Is Bubble? Is Not Bubble? (Part 1 of 2)

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.

*whew*, right?

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.

The Economist:

[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:

  1. Colleges are too expensive and inefficient;
  2. Students don’t work very hard and learn little;
  3. There is an abysmal lack of information on which to evaluate the effectiveness of universities or the return on public investments in them;
  4. A minority of students graduate on time, and many don’t graduate at all;
  5. There is a total disconnect between enrollment levels and student curricula on one side and needs of the American labor market on the other;
  6. 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.

Sandy Baum and Michael McPherson:

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.


  1. I am consistently amazed at the lengths that people are willing to go to prop up the fantasy and cultural myth that our society has made of higher education.

    This camp views college, grad schools and law schools as some kind of magical alchemical process that will transmute people on an intrinsic level regardless of the external benefits that it may mean in terms of debt & employment. Even better is that they keep trying to prove the intrinsic changes by pointing to the external benefits when all of the data is showing more and more that the world has changed (Just like you Vedder and my more data minded brethren argue on a regular basis).

    I feel like I’m taking crazy pills!

  2. “A house is an investment vehicle much more like silver or stock shares than it is like a degree.”

    I’m going to go bash my head against the wall. The problem with the housing bubble wasn’t houses being transacted from one party to another, it was that those transactions involved mortgages that were written at ever-higher amounts without regard for the payback prospects, and all on the assumption that mortgages were “guaranteed,” they were bundled and used to back securities.

    You’re exactly right – it’s debt, and he’s completely distorting what happened in order to make student loan exuberance somehow justifiable.

    A guarantee/insurance against unemployment… LOL.

  3. LSTB,

    The answer to your question on Balkinization is that I don’t know what information students had in the 1950s. Shag’s answer to your question sounds right–it was a time of much less information and grads bumbled along though hustle and connections.

    Your general analysis of the current law tuition bubble, which indeed exists, is persuasive. Many factors contribute to the situation, but I believe the core dynamic is the combination of high federal loan guarantees and relatively inelastic demand for law degrees (propped up by irrational optimism on the part of prospective students, misleading information put out by law schools, and a general over-estimate of the expected value of a law degree). The federal loan guarantee enables reckless loans, and these ready loans eliminate discipline on law schools to keep tuition down. Thus tuition keeps going up even as lawyer pay (at least in one half of the bi-modal distribution) lags behind inflation–and students keep coming.

    At least for now…We’ll see what happens when the bubble deflates.


    1. Brian,

      Thanks for replying. Shag’s response was excellent.

      I asked because we hear so much about prospective law students relying on U.S. News and law school graduate employment survey data before going to law school, but U.S. News only started publishing those data in 1997 and the Internet hasn’t been around for very long. I just wondered how people informed themselves before then, especially in Shag’s pre-Title IV era.

      By now you should know, I greatly respect your efforts to reform legal education, especially since you are the first law school faculty to bring up bankruptcy reform for student debt as part of the solution, during that Westlaw panel.

  4. Matt, Demos and J-Dog:

    I was at a fancy-ass luncheon on Monday. The chief economist for the governor’s office of bugdet kept saying that 2/3 of future jobs will require a college degree.

    I was the first to raise my hand. My question was:

    “Richard Vedder, economics professor at Ohio University, noted that 17 million college-educated Americans are working in jobs that do not require a 4 year degree. I review plenty of RDA plans, and I see plenty of new McDonald’s, Subway, and Wendy’s locations – as well as movie theaters, call center gas stations, and convenience stores. There is a paucity of high-tech, decent-paying jobs. I hear policymakers and politicians constantly harp on the need for higher education. Since you are here, could YOU tell us what these “jobs of the future” will entail, what industries they will sprout from, what areas of the country they will be located in, and how we will fund them?”

    This supposed “expert” gave me a 10 minute, long-winded NON-ANSWER. Even people at my table were laughing at his ineptness. And this bastard is a chief economist.

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