The Next Bubble

September 10, 2010 Tagged with: economics

Student loan debt exceeds credit card debt in USA: I think the student loan bubble is the next one to burst:

Total student loan debt exceeds total credit card debt in this country, with $850 billion outstanding [...]

[...] With tuition far outpacing inflation for the past 20 years, student borrowing has continued to grow – a whopping 25% last year. Some students who are borrowing never expected to, but their parents have lost jobs or suffered other financial setbacks in the recession.

I read a really good article the other day (can’t find it anymore) that showed why the student loan market is so lucrative and why higher ed tuition keeps going up and up. The flow goes like this:

  1. Student loans are guaranteed by the government. If the borrower defaults (fully 25% do – think about that for a minute...), the government will even collect on the debt. This results in absolutely no risk to the lending institution.

  2. With no risk, banks will make student loans to anyone.

  3. Since anyone can get a loan, the pool of customers for colleges is enormous.

  4. Supply and demand dictates that an abundance of demand means prices are going up with no end in sight.

What this also means is that any tightening of the student loan market would be disastrous to colleges. The only reason tuition is skyrocketing is because tHere’s a never-ending line of potential students, all with government-guaranteed cash in their hands, ready to spend.

If anything were to compromise that source of customers, tuition rates would tumble in a big hurry. In the end, they would probably correct themselves to some reality-based pricing model. When this bubble bursts – and it will – we’ll look back on present tuition rates and just shake our heads in disbelief at what people were paying – much like we’re doing with the housing market now.

Problem is, with a 15-year-old headed to college in three years, are we just at the unfortunate peak of this bubble? Are we going to be like people who bought houses in 2005? Short of putting off college until the bubble bursts, what’s the option for a high school graduate dead-set on getting an MBA?

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