College Loans: The Next Bubble?

Thursday, April 14, 2011

Last year, for the first time, the level of student debt ran higher than the level of credit card debt. This happened partly because credit card use has been on a downward slope ever since late 2008 and partly because the upward slope of college tuition loans shows no sign of leveling off. The two trends are, of course, related. The recession has caused consumers to use credit cards less and has also caused more people to seek higher education to compete for scarce job openings (or to take a leave of absence from the discouraging job market), taking out loans because they and their families are less able to pay their own way.

This trend worries me for several reasons. One is the big-picture worry that we’re seeing the growth of a bubble. Like the housing bubble, this one involves people taking on lots of debt to acquire a commodity that they desire because it keeps increasing in value.

The present situation differs from the housing bubble, however, in some important ways. The value of houses kept increasing because of constant demand from home buyers and then crashed when the market became glutted with houses that were foreclosed on. The value of a college degree, however, keeps increasing because of the demands of employers. Even for positions where bachelor’s-level skills are not needed, employers tend to prefer job applicants with a degree, and it seems unlikely that this behavior will change. Unlike a house, a college degree is something the banks can’t repossess and throw on the market, so it’s hard to foresee a scenario in which bachelor’s or associate degree suddenly loses its value. Yes, there are a lot of people with college degrees who are unemployed right now, but the recession has hit those without degrees much harder.

The way this bubble might pop would be if massive numbers of college loan holders defaulted on their loans, like the homeowners who walked away from their houses after the value of the houses sank below the value of the outstanding mortgage. Many tuition borrowers have technically gone into default. Last year, the Chronicle of Higher Education reported that one-fifth of the loans that went into repayment in 1995 were in default. With college loans, however, precisely because there is no real estate that can be repossessed, lenders can continue to extract repayment from borrowers who have fallen behind in their scheduled payments. Bankruptcy does not generally free tuition borrowers from their repayment obligations. Lenders can garnish wagers; for federal loans, the government can also garnish tax refunds and even disability checks and Social Security payments. The danger is that in a future wave of college loan defaults, even these methods of extracting payments would not be sufficient to save lending institutions from a crash similar to what happened when the housing market collapsed.

Although there is reason to worry about what might happen at the macro level, I’m more concerned about what’s already happening at the micro level. Tuition borrowers who fall behind in their payments take a severe blow to their credit ratings and may be unable to borrow to buy a house or car. Even those who are able to keep up may find that the burden of loan repayments cuts into their disposable income for many years. Young people sometimes talk about the problem of when to tell a potential mate about your college loan. Second date? Third date? With rueful humor, they sometimes compare it to having a herpes infection or a family history of insanity.

From my perspective as a writer about career development, I’m particularly concerned about the effect of college debt on career choice. I fear that the burden of college debt sways too many students to elect majors that are potentially lucrative but ill-suited to them. An article on the Yahoo! site mentioned a student who graduated from Northeastern University with $200,000 in debt. She probably could have managed her college planning better (for example, starting at a community college and not taking a semester abroad), but it’s interesting to note how many people who commented on the story assailed her for majoring in sociology. For example, one person wrote, “I would pick a major with a higher ROI if I knew I was gonna rack up that much debt.” I would hate to see the day come when only students from well-off families can major in the liberal arts or social sciences.


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