Are Student Loans the Next Housing Bubble?

New post from Mark Tuminello –

Mark Tuminello student loan bubbleThis article from the Huffington Post caught my eye.  The article points out nine ways that the housing ‘bubble’ of the last decade resemble the current state of higher education.  I work in both the financial and higher education sectors, and wanted to share some of the thoughts here.

The first similarity is that the same players are at work here.  We’ve got borrowers taking on loans that they may not be able to pay back.  We can expect that a percentage of students will become swamped with the debt they accrue in college.  The producers here aren’t homebuilders, but the providers of education – universities.  They continue expanding the offering, not planning for a potential fall in price.  The government, a provider of loans in the housing bubble, is actually the largest student loan provider.  And the non-governmental lenders, some of them, are lending irresponsibly.

Excess capital was a major component of the housing bubble collapse, and are similarly incentivizing risky loans to students.  Then there is ‘universal belief.’  In the case of higher education, borrowers (students) believe that they have to go to college, whatever the cost.  This encourages taking loans for students who may not be in the best place to start borrowing large sums of money.

We have overvalued assets.  Degrees cannot be re-sold, with their only financial value being better access to higher-paying jobs and connections.  Since these aren’t guaranteed results of higher education these days, college risks being unprofitable.  Add that to the fact that there is no down payment, no requirements of former employment, and we’re starting to see a problem develop.

Like in the finance sector, student loans are being securitized and sold.  Student loan risk is not being properly assessed.  They are based on credit score, which is insufficient when we consider these are people who have not been in the workforce in any serious way, and will be looking for jobs amidst relatively high unemployment.

The student loan asset security market is valued at over $2.5 trillion, and I haven’t read a lot of studies as to what effect a collapse of a bubble that size would have on a recovering economy.  Nevertheless, speculation would leave us to believe that the value of a college degree continues to go up.  With an increasing number of graduates, that might be too great an assumption.

Looking at these similarities, it may be wise to look back at the housing bubble and see if we can avoid making more of the same mistakes.

from Mark Tuminello

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