Without referring to a media survey, it seems articles on student debt are growing in number, which is good. Slate’s Annie Lowrey collected a bunch of recent pieces and concluded that higher education isn’t a bubble. The Economist’s U.S. politics blog, Lexington, also began exploring the question with skepticism.
While the skeptics out there agree with the comparison between mortgage debt and student debt, they disagree with the bubble hypothesis on the following points. I’ll include my responses to save reader screen scrolling.
1). Degrees are inalienable.
The analogy is much feebler than it superficially seems, as a house and an education are fantastically different kinds of assets or investments.
A house is an investment vehicle much more like silver or stock shares than it is like a degree. It can be readily bought and sold. Americans had a housing bubble not just because they bought more homes, but because they speculated on homes, snatching them up, fixing them up, and pushing them back onto the overheated market…
No such market for college degrees exists: You cannot trade your University of Phoenix B.A. for a Yale degree when you start making the big money…
LSTB: So what? You can have irrational exuberance without speculation on secondary markets. What’s common to asset bubbles isn’t that the assets are overvalued as such, it’s the excessive debt people incur to buy the assets. If everyone buys overpriced houses with cash, there’s no effect on the financial system (see point (3)), and the phenomenon is instead a fad like slap bracelets were in the third grade—not a bubble, but you’ll be living off social security if you squander your life savings.
On the other hand, skeptics ignore the speculation on student loan debt, called Student Loan Asset-Backed Securities (SLABS). From n+1’s Malcolm Harris:
In 1990, there were $75.6 million of these securities in circulation; at their apex, the total stood at $2.67 trillion. The number of SLABS traded on the market grew from $200,000 (sic?) in 1991 to near $250 billion (sic?) by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50 percent or more across the board, SLABS have not suffered the same sort of drop.
Is anyone entering into swap agreements to exchange loans for SLABS? That would mess up the financial system.
2). Degrees have value.
A diploma is a polymorphous investment. It is a guarantor of higher lifetime earnings: The ‘college wage premium’ for highly educated workers is in the tens of thousands of dollars per year. It is also an insurance policy against unemployment, a signaling device to employers and peers … and a place to make friends and connections. Most importantly, it is a way to learn new skills and information…
It could be that [Peter] Thiel is right, that college students, en masse, are overpaying for their educations. But it seems more likely that some college students attending certain types of schools are overpaying.
[M]any colleges offer a mediocre education. But this is hardly new … But for all its faults, the singular genius of the American system of higher education, by contrast with the more monolithic systems in Europe, is surely that tertiary education is available in so many different forms at so many different prices.
LSTB: The college wage premium and insurance against unemployment are not based on some magical mushroom property of degrees but is attributable to employers using degrees to filter out large numbers of applicants. As to the claim that diplomas guarantee higher lifetime earnings, I defer to Richard Vedder’s recent carpet-bombing:
The six biggest problems with American higher education are:
- Colleges are too expensive and inefficient;
- Students don’t work very hard and learn little;
- There is an abysmal lack of information on which to evaluate the effectiveness of universities or the return on public investments in them;
- A minority of students graduate on time, and many don’t graduate at all;
- There is a total disconnect between enrollment levels and student curricula on one side and needs of the American labor market on the other;
- Federal student financial aid policies have been a spectacular and expensive failure…
Almost one-third of American college graduates today hold jobs that the U.S. Department of Labor says requires a high school education or less. We have vast numbers of college educated taxi drivers, bartenders, waiters, beauticians, and so forth. I had a fellow with a master’s in history cut a tree down for me last year. More and more people are graduating with big debts only to take a job that pays modest amounts and requires no higher level educational skills.
Some degrees have labor market value; many do not.
3). Student debt isn’t a macroeconomic problem. (At least, that’s what I think they’re saying.)
The [housing] bubble burst when people started defaulting and stopped buying…
But what of the loan bubble, the outstanding pool of nearly $1 trillion in debt students have racked up paying those spiraling tuitions? It is worrisome, but mostly for the individuals on the hook for ballooning payments, not for the whole financial system, as with mortgage-backed debt.
For better or worse [!!!], students cannot discharge college loans through bankruptcy. (They can, of course, go belly up on their mortgages, credit cards, and other commitments.) Default rates are rising, but the government backstops against many losses and often actively pursues debtors. Plus, the pile of student-loan debt seems enormous. But in comparison with housing, it is peanuts. There is about $1 trillion in outstanding student-loan debt, versus $10 trillion in residential-mortgage debt. It seems unlikely it could trigger any kind of economy-wide crunch.
But really, does anybody have a handle on what the proper ratio … of credit-card debt and student-aid debt [is]?
LSTB: When student debt surpasses credit card debt, it means that the composition of household debt is changing, the significance I’ll explain in part 2. Lowrey’s right that student debt won’t topple the economy in a climactic way as the housing bubble did. The difference though isn’t that student debt is small compared to mortgage debt. Instead, the difference is that the federal government is already required to bail out the creditors, and private lenders are protected by the bankruptcy code. What we will or are experiencing is a death-by-a-thousand-pinpricks bailout.
To be continued in Part 2.