THE HOUSING BUBBLE REINCARNATED

The Student Loan Bubble

by Dr. Alessio Lidozzi

Question:

Is the United States’ student loan debt bubble headed towards the same burst that the housing bubble

experienced in the last ten years?

In an interview with CNBC, Mark Cuban echoed a widespread sentiment that there is virtually no difference in the two bubbles.

THE HOUSING BUBBLE

Many will remember how the United States government took a big turn in mortgage lending in the mid-1990s, telling government-backed firms Fannie Mae and Freddie Mac that 40% of their loans had to go to low-income borrowers. On top of this requirement, the government issued tax breaks and the Federal Reserve dropped interest rates to historically low levels, increasing the “affordability” of these mortgages.

THE HOUSING BUBBLEBecause the government was essentially taking on the risk for the housing loans, mortgage lenders were not cautioned by the potential risk of these low-income borrowers defaulting and approved loans to more people than ever before. This surge in funds caused housing prices to skyrocket, which then increased the size of the mortgages being issued and made it more difficult for low-income borrowers to pay off debt or spend their money anywhere else. The rest is history.

THE EDUCATION BUBBLEStudent loans are headed in the same direction,

perhaps to a more debilitating end. To put things in perspective: home prices rose 400% in the last 40

years…

THE EDUCATION BUBBLE

In the same time span, the price of a private education has launched into orbit, increasing by over 1,000%.

THE LOGIC

The argument is that the two bubbles are the same because the government’s policy to provide low-interest loans to students increases tuition just as housing loans wound up increasing the price of a home. If students’ purchasing power is crippled by onerous debt, they cannot participate in the economy, which effectively holds it back.

PROBLEMS.

Another problem is that these increased tuitions serve the administration of a university rather than the quality of

education. It’s for the same reason that the donation of a wing or building serves little to no philanthropic purpose: the

administration feels a release from the pressure to use school funds to recruit better faculty or invest in more resources for

students.

PROBLEMS.

Instead, the administration winds up reallocating the funds to themselves, another enormous issue. As

Cuban said, you know there’s something not quite right when there are more administrators than

professors pulling in over $200k per year.

SOLUTION?

A potential solution to this problem would be to put a limit on the amount of the loan guaranteed by the government.

!However, any trade off at the expense of greater access to

higher education will certainly be a difficult one to promote.

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