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.
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
Related posts:
American mounting student loans a 'debt bomb' waiting to explode! Inside America’s Student Loan Bubble!
American Student Loan Debt: $1 Trillion and Counting
America, a "Generation of Sissies"
A "great haircut" for U.S. growth
US student Loan Crisis, an Education Bubble?
Peter J Reilly
Kelly Phillips Erb
Sheryl Nance-Nash
CCAP