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Is There a Student Debt Bubble?

A recent article in The Atlantic looks at student debt in the United States and suggests there may be a student debt bubble. Written by the authors of the recent book, Higher Education?, the article points out that “college loans are nearing the $1 trillion mark, more than what all households owe on their credit cards.”

The article also features the following provocative excerpt:

“If you want to get a name as an economic seer, try this one. The next subprime crisis will come from defaults on student debts, starting with for-profit colleges and rising to the Ivy League. The parallels with housing are striking. In both, the written warnings aren’t understood, especially on penalties and interest rates. And in both, it’s assumed that what’s being bought will rise in value, in one case the real estate, in the other the salaries which will accrue with a degree. One bubble has burst; the second is already losing air.”

In Canada, debt on Canada Student Loans is approaching $14 billion (an amount that does not include debt owed on provincial or private student loans).  Given that we have roughly one-tenth the population of our southern neighbours, it seems to me that our student-loan situation may not be as serious as theirs. That said, the prospect of a student debt bubble in the United States is something worth watching.

Enjoy and share:

Comments

Comment from James T
Time: August 24, 2011, 11:59 am

Thanks for the post (and the link to The Atlantic article as well).

Leave it to the States to create problems in everything from housing to student loans. I’d be especially fearful of the student loan situation as the loans can’t be discharged. Imagine filing for bankruptcy and still being on the hook for tens of thousands of dollars!

As far as I’m aware, loans can be discharged in Canada if you file for bankruptcy, but only if you file 7 years after graduation (5 years if you’re suffering “hardship”). And even then the government can oppose the discharge.

Another quick note: The problem with the comparrison to the housing market crash (this from The Atlantic article) is that a house is an asset, and will retain some worth. What can you take from a broke graduate? I suppose the biq question that society needs to ask is: what is a degree, and a degree holder, worth?

Same old story though — graduates are underemployed (or unemployed); burdened with debt; smart enough to know they’re in trouble, and that they can do little about it. Oh, except regret that they didn’t take engineering, business or nursing.

Comment from JR
Time: August 25, 2011, 11:58 pm

There is definitely merit in the question ‘what is a degree holder worth’ and that is something that any bank has to ask itself before granting a student loan. There is, however, a basis in comparing the housing market crash (subprime crisis) to a possible student debt bubble bursting. It can be found in the words ‘creditworthiness’ – like the subprime victims, students are in a weak position – with little or no collateral – at the outset of their loans and are betting on their futures. Additionally, as with subprime loans, student loans are bundled and resold. When massive defaults occur, the effects can be grave, as we well know.

Comment from Erin Weir
Time: August 26, 2011, 1:28 pm

CNBC has a documentary on this subject.

Comment from Nick Falvo
Time: August 26, 2011, 1:39 pm

Wow–thank you, Erin!

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