What a Student Loan 'Bubble' Bursting Might Look Like
Let's game this out a bit.
Illustration by Kitron Neuschatz
I hated the film adaptation of The Big Short. The acting was good and it did have a surprising amount of energy for a story that centers around men in suits doing math. But I felt condescended to. Maybe director Adam McKay tested an original cut—one minus Margot Robbie—and realized a good amount of the audience couldn't follow the plot without having a sexy lady in a bathtub break the fourth wall to explain subprime mortgages and the financial crisis.
In some ways, America's student-debt crisis is a lot simpler than all that.
Over the past few years, I've written a lot about how current and former American students are roughly $1.5 trillion in the hole, and how this system is helping prevent an entire generation from achieving milestones of adulthood such as marriage, homeownership, and saving for retirement. In that time, I stumbled on a simmering debate among economists and student-loan experts. Some argue everything is basically OK, because the student-loan default rate for people who went to public colleges has been holding roughly steady at around 11 percent (though it's grown over the years), and average lifetime earnings of people with a degree has tended to be about 75 percent higher than that of people with a high-school diploma or less. But others push back on this, citing the volume of defaults and also the sheer number of people involved in income-based repayment plans that allow them to nominally stay on good terms with their provider while never chipping away at the principal of their loan.
Basically, what these people have been arguing about is whether or not higher education constituted a kind of speculative bubble. And while Margot Robbie could explain the conditions that create such a phenomenon in about 90 seconds, real life is often more complicated than a movie based on it. Though some voices have certainly used the specific term "bubble" to describe the US higher-education system, it's not a mainstream view. Still, it seems obvious that something's wrong when a whopping nearly 40 percent of borrowers are expected to default on their student loan payments by 2023. So I set out to get a sense of what calling the student-loan system a bubble actually means, and what that bubble bursting might look like for basically anyone who has attended or is considering attending college in the future.
What I found was not particularly reassuring.
Despite living through multiple so-called bubbles, I started out by clarifying my terms. Brent Goldfarb, a professor of business at the University of Maryland who's also the co-author of a forthcoming book called Bubbles and Crashes: The Boom and Bust of Technological Innovation, explained that the easiest way to understand a bubble is to think about a stock that people keep buying mostly because other people are doing the same thing. This usually happens when a company or product has a compelling narrative around it that isn't backed up by data. Think about a Silicon Valley start-up that promises to change the world by disrupting the tube-sock industry, or a cryptocurrency made by people who swear that their specific shit-coin will be the one to revolutionize banking. Even if other people fall for the story, that doesn't mean you should be taking out a second mortgage to bet on it, too.
"It would be revealed to have been a bubble if it turns out there was no way to justify the beliefs that it was such a good company," Goldfarb said. "They make for a really good narrative, they're easy to invest in, there's a lot of uncertainty about the future value, and it's often about a lot of novice investors."
The best-known example of a recent speculative bubble centered on mortgages and the homes Americans live in. This example has more moving parts than a buzzy company, sure, but the thing to take away from it is that it involved not just one but (at least) two sets of people thinking the price of something was going to keep going up—both the people acquiring property and the ones lending them the money to do so.
Although the nuances of the bursting of the early 2000s dot com stock bubble and the (roughly) 2006-2008 housing bubble were quite different, they did share some similarities. In both cases, one root cause of trouble was a mass, runaway delusion about the value of a commodity relative to its actual worth. By that metric, you can make a case student loans and higher education fit the bill: As I've previously reported, there's currently some serious confusion in America about the value of a four-year degree—or at least enough that plenty of well-paying jobs in the trades have gone unfilled. Meanwhile, some people are more than happy to spend $100,000 on a graphic design degree that may get them a job paying roughly $40,000 a year. Something seems off there.
A lot of that has to do with what Goldfarb likes to call the narrative—one that convinced kids that the only route to middle-class respectability was to get a college degree and that suggested failing to do so meant having failed at the American dream of upward mobility. To keep using the economist's terms, I would also say that 18-year-old high school seniors definitely qualify as "novice investors." Their philosophy can be summarized by Colin Hanks in the 2002 movie Orange County. When asked why he's so obsessed with getting into Stanford University and college more generally, he snaps back, "Because that's what you do after high school!"
OK, so if it isn't patently absurd to look at the student-loan crisis through the lens of a speculative bubble—a CNBC story made a strong case last fall—at what point might it burst, as bubbles tend to do? Is it when college becomes so financially unreasonable for most people that only the cash-rich start going, or when the government loses the ability to collect on the loans en masse? Something else?
Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities, said the fact that people like me were calling him to ask those questions meant some kind of trouble was already upon us, or at least pending. And while he hedged a bit against calling student loans an outright "bubble" and from asserting that easy credit (in form of those loans) was the sole reason for massive tuition increases, he did refer to the idea that we're arguably in a sort of mass delusion about the value of a four-year degree as an essential part of the problem.
"We stand tall on this sort of alleged million-dollar wage differential between having a college degree and not having a college degree without acknowledging that not everyone who makes a run at it makes it," he told me. "It's sort of like the Wall Street Journal only printing the stocks that went up without also including the fact that a bunch of people also lost money the same day."
To be clear, Nassirian advocates for programs like free college that would mean people don't have to take out loans at all in some cases—and I share his sentiment that getting a college degree, in the abstract, is a good thing. Still, I asked him to game out what I suspected would be the most likely outcome of a so-called bubble bursting: Congress putting caps on the amount of loans the federal government would guarantee. According to him, a number of "predictable" things would happen: The size of national enrollment in higher education would significantly diminish because people would have no overnight vehicle to replace federal loans, and as a result of that, a good number of institutions might well go out of business.
By his estimate, that would probably include the entire for-profit sector, since they have to earn 10 cents on the dollar from sources apart from federal student aid, loans, and work-study programs, which is something many already struggle with. A number of private colleges that are heavily tuition-dependent and don't have a lot in terms of endowment or fundraising capacity would also be in trouble. Less obviously, there would be plenty to worry about in the public sector, such as community colleges that don't charge tuition in some instances, to four-year schools with escalating costs and diminishing public support. "There's no evidence that states are going to step up to fill the gap, and even cutting amenities like lazy rivers and big sports programs and bloated administrative salaries wouldn't make up for it," Nassirian said. "That would be like attempting to balance the federal budget by eliminating foreign aid."
All this means that while America would have fewer (new) cases of people being a million dollars in debt, the country might be even more stratified by class than it is now.
Meanwhile, Persis Yu, a staff attorney at the National Consumer Law Center, presented an even more alarming possibility to me: That the student loan market may share a lot of characteristics with an economic bubble—except for the one where there is a possibility of relief. She was careful not to minimize the devastating emotional impact of needing to, say, walk away from your home. But short of fleeing abroad or going underground or something, you can't ever—ever—walk away from student debt. The idea that college might be massively overvalued amid a deluge of irreversible debt sets the stage for some kind of (potential) collapse to be more devastating.
"You're not going to see the entire market bottom out, I don't think, like we did in the foreclosure crisis, because you won't see everyone default and then the bank is left holding the bag," she said. "Here, everyone defaults and the government just takes their wages, tax refunds, or Social Security benefits."
For his part, Marshall Steinbaum, research director at the left-leaning Roosevelt Institute, argued that student debt couldn't explode in a traditional "bubble" because it tends to be unsecured. That means you can't sell off your college degree at a loss the same way you might dump your house in a fire sale—or have it repossessed by a bank or other creditor. That piece of paper might become worth way less than you paid for it, but ultimately you're stuck with it.
That's perhaps the most depressing thing about the whole student-loan story. When you go back to the early history of student debt, the idea was originally at least in part to give lower-income students a path to a better life (and maybe also help the government win the Cold War). This makes sense from not just a moral but also economic perspective: If someone was a brilliant student and borrowed a couple grand to attend MIT, that was a pretty good gamble for everyone involved.
Now, regardless of whether you want to call the current system a bubble, it's clear that what's happening in higher education can't keep going unchecked without serious consequences for millions of Americans and the economy at large. In other words, what started off as a vehicle for achieving the American Dream has been devastated by macroeconomic trends like wage stagnation, greedy college administrators, and borrowers who put status above their own actual wellbeing.
Or, as Nassirian put it: "The road to hell is paved with good intentions."
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This article originally appeared on VICE US.