Student Loan Bubble Will Burst In Face of Millennials
Economic Freedom released a new video last week featuring Dr. Antony Davies, an Associate Professor of Economics at Duquesne University, who spoke about a looming “Tuition Bubble.” (See video below.)
A bubble, in the economic sense, generally refers to an artificial inflation of value for some particular product that is significantly above the normal market value. So how does this apply to debt accumulated via student loans?
As Dr. Davies explains, the best way to understand the bubble is to “consider the recent housing bubble” of 2008 and draw comparisons. We see many similar policies being used: artificially low interest rates, tax incentives for taking on larger amounts of debt, and the government imposing itself as a direct lending agent to students.
There are a couple of other things to keep in mind. Unlike someone who owns a home, students possess no tangible assets from their education—they are simply more “well-rounded” or “employable” human beings. A loan for a home, generally speaking, produces a home; a loan for an education, on the other hand, simply gives you a degree. We are neglecting, of course, those who take loans but drop out of college anyway.
Secondly, student loan debt is extremely difficult to shake off. Even after filing for bankruptcy, one must be able to prove “undue hardship” in order to have the debt forgiven.
So to summarize the situation: the government has artificially inflated a huge market for an intangible product called “education,” price is accelerating upward, and the debt-holders are generally low-income young people with no way to evade repayment if things go bad.
If not, consider this as well: “education” is an abstract product. We do not know what sort of a degree a person is pursuing, and that information greatly affects the wisdom of the loan in question. An aspiring biochemical engineer would usually be a very reliable investment; on the other hand, social work or art majors seem to provide more of a cause for concern.
What this means is that loans are being given out despite the lender not knowing what the product even is.
There are some who reflect on the housing and credit crises and, amazingly, still contend that “more government” is the answer. This idea of a Tuition Bubble— terrible in that it promises to strike those are supposed to be the country’s “future” — should be yet another lesson in the failures of planned economics. Is it not enough that there is actually a Wikipedia page dedicated to the “2007-2012 global financial crisis?”
It is high time that we sit down and figure out what we want to be as a country. On one hand, we decide to go all the way with government planning of things like health care and education, and none of the “half in, half out” policies that allow for the sort of cronyism so characteristic of our current politics.
The other option, if we should be so bold, is to admit the free market’s ability to answer these questions itself. As Dr. Davies explains, the government is not the one to decide which degrees are valuable and which are not; in a free market, this information comes through as various prices and interest rates. Students, families, lenders, and universities are asked to take up the issue seriously and with a mind for their collective futures. It ceases to be “expected” that one has a degree – or even that having a degree is somehow indicative of a person’s growth or development.
A decision must be made soon. Saddling young people with enormous debts, the very people who are supposed to go out and create wealth, will have a crushing impact on the country’s economic future.