The Unsustainable Higher Education Bubble; It’s Showing Signs Of Stress, Has The Deflation Started?

Mark Perry
updated | Author's Website

It’s been widely reported now that the U.S. has a serious and unsustainable “higher education bubble,” not unlike the unsustainable housing bubble in the U.S. that eventually crashed and resulted in a housing meltdown, mortgage tsunami, a wave of foreclosures, and a global financial crisis.  The chart above illustrates that the ever-inflating higher education bubble with ever-increasing costs for college tuition and education supplies is starting to make the housing bubble look almost inconsequential by comparison.

The CPI for college tuition has increased almost 12 times since 1978, compared to the 3.5 time increase in overall consumer prices, and the 4.4 time increase in home prices at their “bubble peak.” What the two bubbles have in common is that they have both been fueled by political obsessions: one with homeownership and another with college education.  And with those political obsessions comes the government-sponsored coerced taxpayer funded assistance that creates the “politically-motivated air” to inflate the bubbles to unsustainable levels: government taxpayer- subsidized or government taxpayer-provided credit at below market rates to borrowers who wouldn’t qualify for credit from private borrowers.

A Los Angeles Times article yesterday pointed out some of the grim facts that suggest that the higher education bubble is showing signs of real trouble:

1. Newly minted college graduates lucky enough to find a job after leaving school are in for a shock: They’ll likely be earning less money, adjusted for inflation, than they would have a decade ago.

2. Meanwhile, college debt is soaring. Last year, students took out $117 billion in new federal loans, pushing the total outstanding to above $1 trillion.

3. The average student graduating from college today has $25,250 in student loan debt.

4. Unlike other forms of debt, student loans are virtually impossible to discharge through bankruptcy. Uncle Sam frequently garnishes paychecks, tax refunds, even Social Security payments from people who haven’t paid their government-backed loans.

A recent article in the Washington Examiner by James Harrigan and Antony Davies provides an excellent summary of the situation:

“The impending student loan crisis, like the recent housing crisis, is born of government meddling, and promises to have similar results. But with the students, the coming bankruptcies will be much worse. 

The anatomy of the housing crisis is simple. Years ago, the U.S. government decided that the path to prosperity was homeownership. When the free market did not provide what the government considered “enough” housing, the government used both carrots and sticks to force markets to lend more money for mortgages. 

When private banks shied away from high-risk borrowers, the government instructed its enterprises, Fannie Mae and Freddie Mac, to direct more than 40 percent of their lending toward low-income borrowers. These two government-sponsored enterprises took lending risk away from private banks and placed it on the backs of taxpayers instead. 

The government also offered tax incentives for people to take on more mortgage debt, and the Federal Reserve made mortgages cheaper by holding interest rates at historically low levels. Predictably, people rushed to secure cheap mortgages, fueling a boom in homebuying and causing home prices to soar over 400 percent from 1976 to 2010. When the rush tapered off, households realized they could not afford to pay their mortgages and declared bankruptcy in droves. 

The anatomy of the student loan crisis is similar. Having decided that the path to prosperity is a college education, and that the free market was not providing “enough” college education, the federal government created Sallie Mae to take lending risk away from banks and place it on the backs of taxpayers. The tax code provided modest tax incentives for students to take on more loans, and lately, the Federal Reserve has continued to make borrowing cheap by holding interest rates low. Sound familiar? 

As with housing, the price of college education has skyrocketed over the last 30 years (see chart above). Just as homebuyers borrowed to speculate on houses they could not afford, students now borrow to speculate on educations that many will not complete, and which others may find to be of little value (see LA Times article above). 

The impending burst of the education bubble will be far more damaging than the housing bubble. When homeowners got behind on their mortgages, they can declare bankruptcy to free themselves of crippling debt. Either they or their bank can offset some of what they owed by selling the collateral — the house. Students cannot rely on either of these things. Bankruptcy does not wipe out student loans, and an education cannot serve as collateral. 

In both housing and higher education, government failed to seek out the reasons why there was not “enough” lending going on. Many people were in no position to afford the loans, and the banks couldn’t afford the risk. With unbounded hubris and dogged myopia, politicians decided to “fix” the market by forcing people and banks to do what each had determined was imprudent. 

Just as the government sought to engineer an increase in homeownership, it now seeks to engineer an increase in higher education. This is the stuff of which bubbles are made. 

The solution is economic freedom: Let private banks determine lending without government interference. Allow people to decide for themselves whether one level of debt or another is prudent. This latest bubble will burst, as they all do. The government, unfortunately, will be there to create another.” 

MP: It seems clear now that because of duel political obsessions, we have “oversold” both homeownership and college education to the American people, by artificially lowering the costs through government intervention and subsidies.  As economic theory tells us, if you subsidize something you get more of it, and that’s what happened with both homeownerhip and college education – but we got too much of it, and that has led to twin bubbles.  Just like government policies turned “good renters into bad homeowners,” it’s now apparent that government policies have turned “good high school graduates, many of whom should have pursued tw0-year degrees or other forms of career training, into unemployable college graduates with excessive levels of student loan debt that can’t be discharged.”  Perhaps economics textbooks in the future can illustrate the concept of “government failure” with these two examples of government-induced, unsustainable bubbles?    

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