Is There a Student Loan Bubble in the Not-So-Distant Future?

Take a look at this ticker. Student loan debt is increasing by $2700 a second, with over $1.3 trillion American student loan debt (when I last checked).


I’ve been wearing my student loan tin foil hat and ranting about a bubble for a couple years now. Think about it: 70% of students are graduating with some amount of debt and college attendance is increasing by about 0.3% a year since 2009. On average students are graduating with $35,000 in loans. The bachelor’s degree is now argued to be the new high school diploma. Being employable now depends heavily on your education, the higher the better – and students are willing to pay money they don’t have, and likely won’t be able to pay back in the foreseeable future (or ever), for the advantages that come with a higher education. $1.2 trillion, that’s a lot of money, and a lot of interest for these loan providers.

There is likely already a relationship between federal and commercial aid/loan options for students and the increase in college attendance. But recently, the Federal Reserve of New York published a report correlating financial aid expansion with increases in tuition prices. You read that right, as students are finding ways to make college cheaper – colleges are getting more expensive.

Back in 2006-2007, home loans were given to almost anyone and houses weren’t getting any cheaper. Mass foreclosures caused housing prices to tank, a main factor of the 2008 recession.

Are we seeing history repeat itself, just in another industry?

Students are willing to take out large loans to invest in their education, but college is getting more expensive. Employment opportunities aren’t going to get less strict about education level, so students will just take out more loans. Student loans are long-term, to be paid off over many years, thus they have potential as a stable source of income  for banks and the Fed. There is a decrease in state aid, forcing students to seek out loans from commercial banks where there is more flexibility in qualifications. This is scarily familiar. The report does mention that colleges can expand their supply or raise prices, but if they decide to raise prices what’s stopping a student from taking out more loans to afford it? Actually, a more fair assessment would be: in the future, what will stop students from taking out more loans to afford it. Depending on the elasticity of demand for higher education in the future, changes in prices might not even phase some students. For-profit colleges are currently being closed down or investigated for predatory lending, who is to say this won’t extend to banks once again?

Unfortunately this is an issue that only time can solve or define. Perhaps it’s an inefficiency, or maybe a student loan bubble burst coincides with a natural dip in the business cycle. We’ll just have to see how students and colleges respond to each other and pray that supply and demand and the invisible hand guides us to salvation. If not, don’t say I didn’t tell you so. If anything, you should be prepping for your Big Short right now.

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