US student Loan Crisis, an Education Bubble?

I started following the student loan crisis when I noted that student loans seemed to be neck and neck with health care as the primary grievances on the We Are The 99% site.  I was very lucky to get two pretty regular guest posters Alan Collinge and Tim Smith, who have written on the issue from different angles.  I was astonished to get a call from Sallie Mae asking me how they could get their side of the story onto Forbes.com.  At the risk of being prosecuted for impersonating a journalist, I did a brief interview with John Remondi, President and COO of Sallie Mae.  I’m still hoping for some guest posts from Sallie Mae, but nothing has come through yet.  Sunday, I heard from Tim Smith, who let me know that the New York Times was picking up on the issue with this piece.  I invited him to share his reaction.  Here it is.

The Education Bubble Won’t Create A Disaster, Right?

“Looking back, anyone could have predicted the housing bubble.”  This sentiment has been echoed many times, and graphs of the past housing bubble almost make it seem obvious before the bubble burst.  The education bubble?  While many acknowledge the soaring cost – especially those in the education fields – fewer agree that we’re about to see the education bubble pop and create a bigger mess than the housing bubble.  Education may have its critics, but it also has major defenders.

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However, the chorus seems to be changing.  Even the New York Times recently joined with an article that compared the education bubble to the housing bubble (this analogy has been used multiple times, but like the above graph shows, under predicts the mess that the education bubble will cause).  Even while other media players have finally seen this bubble, the warning signs were spelled out on this blog :

These warning signs would be favorable laws toward discharging student loans in bankruptcy (making it more challenging for students to receive money for education); a societal zeitgeist toward education changing (for instance, businesses preferring certification or a degree from something similar to the Khan Academy over traditional colleges); a major recession coming back to the United States, taking away more employment (making it more difficult for student with loans to pay back their loans); students becoming discouraged by negative news toward education (causing many to drop out or to avoid college).
Of course, some readers might wonder if all four signs must appear for the education bubble to pop, and the answer is “No”.

Even though the education bubble has received attention, few expect the consequences to be bad.  In fact, the Times’ article mentions that economists don’t see the consequences being similar to the housing bubble – in other words, the education bubble pops, and everything is fine.  Consider the potential reality:

1.      High student loan balances discourage future and current demand for other products and services (consider the attitude, for instance, of Natalia Antonova, who faced a debt crisis with her student loans).  This subtracts money flow from the economy to provide jobs in other areas.  Even without the bubble popping, this is the current situation.
2.      If the demand for education drops, the consequences will affect those in the education system – schools will need fewer professors, advisors and others in the education field.  This will create a terrible job hunting situation, where graduates will be placed against high-credentialed people (some of whom may have been their professors).  Remember that in order to keep these people employed, the demand for education must remain the same or rise.
3.      If the demand for education declines, the demand for educational products will decline also – textbooks, construction, and many of the expenditures that some colleges think are necessary to provide a good education.  This drop in demand will cause business, which sell products and services to educational institutions, to cut back on their staff to offset their losses.
There is one way in which economists might be right – if wages began to soar.  Like the housing bubble, Americans felt the mess because the decline in housing prices meant that debt was owed on something that had little value.  If education continues to rise, while wages stagnate or slowly rise, a college degree will be like a home, which has lost its value.  If wages soar, however, a college degree will still mean the path to prosperity.

Tim Smith blogs on the “Echo Boom”, also known as Generation Y (Americans born between 1980 – 1995). Tim has previously appeared here discussing his generation’s attitude towards homeownership and education.

I’m beginning to think that the “bubble” metaphor may not work that well for education.  In the case of the stock market and real estate people own assets that they think they can sell at any time for some minimum price.  Then something happens and everybody heads for the door at once.  At that point the seeds of the next bubble are sown, because the assets have some level of intrinsic value and somebody will buy them for something and may get rich on the next turn of the wheel.  Educational credentials, on the other hand, are not at all fungible.  They can only be cash flowed, not liquidated.  If they are not used when fairly fresh, their value erodes rather quickly.  The actual economic value of the credential will often be quickly replaced by the experience which the credential enables.  

By Peter J Reilly, Forbes Contributor Newscribe : get free news in real time

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