I understand you don’t believe student loans are in a bubble. How do you counter what this guy is saying?
I don’t know who “you” is but I certainly have come to the conclusion that the education loan environment is one giant bubble about to burst. The professor did not mention that there is more student debt outstanding than there is credit card debt.
Everything he says is spot on. But I wonder about the term bubble.
The thing is, a person taking out a student loan has lost his money the moment he signs up. He is in debt, and will never get anything of value in exchange. But his getting cheated does not influence what happens to the next fellow. A, B, C…, and Y can all be cheated, all enslaved for life because of their loan, or not. What happened to them does not affect what will happen to Z, because their education is nontransferable. In short, there is nothing to stop the student loan scam from going on forever.
Contrast this with a housing market, where if A, B,.. down to Y pay for a house, they can all decide at some point to sell it, changing the price Z will pay for it, bursting the bubble.
The only thing that can stop the loan swindle is if the govt runs out of money, meaning they stop printing for a while, fearing a collapse of the currency. But that doesn’t seem likely..
Maybe people wising up to the fact that a college education is just not worth it will burst the bubble. But how likely is that? Ask P. T. Barnum.
This is not entirely true. I owe money (very little, but only because I have been mostly subsidized as a student; but, even if all my education was paid for through loans I wouldn’t consider it a loss). But, in the process I earned two degrees. These two degrees (will) help me earn a decent income as a financial analyst or whatever. I will pay back these loans. Without these loans, I would have never been able to pay for college. Or, I would have worked full-time and taken twice as long to go through college – that definately is a higher opportunity cost.
Yes, a lot of student loans go to waste. But, this isn’t a universal truth. Plenty of people use their student loans productively.
That student loans lead to relatively sub-optimal outcomes is one thing, but taking out a student loan is not an automatic loss to the student.
Jonathan,
Yes, there is a small minority that gains from it. I was speaking of the vast majority. Did you see the video, which also points this out?
BTW, have you repaid your loan yet? In how many years from now will you manage to do it, if you haven’t yet? What if you don’t find the job you dream of, say because the market for financial analysts collapses for one reason or another? How long will it take you in that case?
@Smiling Dave
I can’t quite tell if you consider the college “loan swindle” to be a bubble or not from what you wrote. The way I see it, the more college is subsidized, the more investment there is in college by colleges. Colleges receive more money, and they use this money to grow their infrastructure. Eventually, when people realize that college is no longer worth the cost, colleges are stuck with all this extra infrastructure that they no longer can use. And that is just the actual infrastructure, nevermind all the people who must be hired in order to run colleges and universities. This seems to be a bubble to me, but maybe not.
The worst thing about the discussion is that the professor accepts that just getting a certain college degree will give you the ability to make 1 million dollars over those without degrees. Then he claims that any degree is more valuable to a person than not having one.
The first part about the 1M is just wrong. The surveys that these professors use to determine this miss several things that skew the results:
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The no degree folks include failures from people trying to get degrees. How is this reasonable? These folks should not be included.
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The degreed folks include certified professions: medical, law, engineering, accounting, etc. These folks get to belong to a government provided cartel so any result that uses these people is skewed.
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The no college group includes not only people who did not want to go to college but also those that could not get the degree anyway. These folks should be adjusted out.
Making these ajustments would dramatically close the gap on all professions and leave may of those with degrees who did not have an advantage over their undegreed peers at a huge disadvantage.
The second premise that in all professions getting a degree is more valuable than not having one is very dubious. My significant other is a real estate agent and all she does has nothing to do with any degree. She is one of the better agents maybe in the top 70% in commissions. And beneath her are lots of people with degrees.
Be careful on statements of value as all of it is subjective. A person drowning in student debt may still value their degree and feel that it was worth the money.
gotlucky,
I see where you’re going, but why shoud it all ever stop, is my point.
College education - at least in the US - is definitely in a major bubble. And not only is it a bubble, it’s actually a trap for many. Not everyone will be trapped but a large chunk will be.
What’s the trap? Well, government student loans are the only debt besides tax debt and child support which cannot be discharged in bankruptcy court! It’s a fact, folks, look it up. Look at the power of the IRS. Look at the power of child support divisions. They can take down anybody that gets in their way. And now, private holders of Federal student loan debt also have this terrifying power.
This has created a mad rush of investment in private “loan consolidation” companies who know they are holding 100%, gold-plated, bankruptcy-proof, follow-you-to-your-grave-or-prison-its-your-choice, debt. Conventional political wisdom is that “the majority always wins” in a showdown over resource allocation. But the housing crisis proved that the masses can be swindled right in front of their faces as long as the Elites have had time to properly plan their escape maneuvers during the bubble burst. The 2008 housing bubble was a perfect swindle. They ramrodded through trillions of dollars in “emergency” government aid - not to mention trillions more in unilateral Fed actions - all of which went to prop up the big institutions filled to the brim with 1%-ers. The public’s solution? More government!
Anyway, the point is that “loan consolidation” companies are ballooning while student loan debt is rapidly expanding. I got my degree with the assistance of student loans. It’s a good degree and I have a great job because of it. I’m still paying the loans and it’s been 7 years since I graduated. And I went to an inexpensive college. Many of these “students” are hopeless buried under a house-worth’s of debt, debt they will almost certainly never be able to repay and which they cannot discharge even in bankruptcy court. The Elites have long since planned their escape maneuver when this bubble bursts. The professors and “our staid universities that are the core of our national competence in the world market” will certainly be bailed out. Goldman Sachs and its ecosystem of criminal loan sharks will once again be bailed out to the tune of trillions. And the masses will eat it up. They’ll cheer it on, in fact. We’ll probably be at war at the time and it will only be the patriotic thing to do.
Clayton -
Smiling Dave,
If the vast majority lose from student loans it’s not because of the loan, but because they made a bad investment with it. And, it’s not because the “signals” were off, but because a lot of people simply are not fit to make those kind of decisions. That someone spent $200,000 on a sociology degree isn’t the fault of the loan, it’s the fault of the investor (education is an investment).
Probably less than a year.
Thank God that (a) that’s not likely and (b) there are dozens of alternative jobs I can do with what I learned and with the degrees I (will) hold.
If college prices continue to increase relative to parents’ income, I imagine there will be a point where people will just stop buying. There is only so much debt people will be willing to take on.
Gotlucky,
In a labor market where employees with higher education are preferred over employees without higher education, it’s not likely that people will “realize that college is no longer worth the cost.” For most, it is worth the cost.
I don’t really see a bubble. I see an industry starving for funds, because of its socialization. The problem is there: the private allocation of goods in this industry is incredibly limited.
This is incorrect. When the price signals are altered, decision makers are actually misled. This is the crux of ABCT’s disagreement with EMH. Inflation isn’t just “automatically discounted by the market” as Fed-proponents try to use EMH to say. The same is true of the bubbling college industry. Colleges are getting lots of new students. Students are getting cheap loans that are easy to qualify for. Producers feel that demand has increased while consumers feel that costs have gone down. Inevitable conclusion? Bubble.
Clayton -
Jonathan,
Well, the market is this way now, but that does not mean it will always remain this way. It’s worth the cost for people now, but it may not remain this way. Some schools cost as much as $50,000 per year, and tuition is still rising. Maybe this means that most people will just switch from schools that cost $50,000+/year and go to schools that are cheaper. But then isn’t that kind of what happened with the housing bubble? People stop buying $800,000+ houses. They settle for cheaper houses or just rent.
Take a school like BU. The FitRec cost $97 million to build. BU is also building more housing, and BU builds high rise apartment style housing. What happens in 10 years (for example) when BU is just considered unaffordable? How does BU pay for the upkeep (and the electricity and water and the employees) for all these incredibly expensive buildings? And BU is hardly the only school doing this kind of thing.
The costs to run even small schools are huge. Since the government subsidizes college education, I think we can expect that college tuition will continue to rise and rise relative to parents’ income. People used to be able to pay their way through school while working part time if they wanted. Now students typically take on debt that will follow them for 10 years. If the trend continues, debt will follow students for maybe 15 or 20 years. Who would want to go to school with something like that? I expect that people will eventually just say to themselves that it isn’t worth it, and employers will find themselves needing to hire people who don’t have college degrees (not in all industries, of course).
For it to be a bubble, it would have to be unsustainable. While I agree that government subsidies of education are a waste of money, I think it’s sustainably wasteful, unlike the housing bubble.
If education were about improving your human capital (making you more productive by giving you useful knowledge, skills, etc), the current system wouldn’t last. There are much cheaper ways to acquire the same knowledge that would replace the traditional 4-year college (stuff like Khan Acadamy, libraries, maybe an AP Test type system, online schools, etc).
But I don’t think that’s what education gives you. The knowledge learned is usually completely useless for any type of real work–and people forget most of the stuff they learn in classes anyway. Teachers often say that you’re ‘learning how to learn’ or something like that–the idea that even if learning Shakespheare isn’t directly useful, learning about it helps you learn other things faster. But it turns out this isn’t true–learning is very specific, learning how to do one thing makes you better at doing that thing, but doesn’t make you a better learner overall.
The real reason degrees are valuable is that the people that have them were already productive. Having a degree signals to employers a worker’s intelligence, concientiousness, and conformity. That’s why the traditional 4-year degree can’t easily be replaced. If an online school taught the same knowledge a traditional school does, but was cheaper and easier, it still wouldn’t be as valuable, because the students would be lazy non-conformists, and so it would send a worse signal to employers. Even if the students were just as smart as traditional students, and had the same knowledge, it wouldn’t matter. They’d be signalling that they’re weird, or at least non-conformist, and if weird people are, on average, worse employees than normal people, employers would discriminate against them.
So even though higher education is socially useless, because the students aren’t getting more productive, it’s still privately useful, because the student increases his income by getting a valuable signal. And as long as higher education remains valuable from the consumer’s point of view, people will keep buying it. There would certainly be fewer people in college if the government stopped subsidizing it (what bank would give tens of thousands of dollars to an Sociology major?), but the government could keep subsidizing it forever. In the housing bubble, this wasn’t the case–if the Fed kept inflating a bubble forever, we’d have hyperinflation, so they have to stop inflating and pop the bubble at some point. But education subsidies don’t have this problem.
Bryan Caplan’s written a lot about this if you’re interested in reading more:
http://vimeo.com/37807144
http://econlog.econlib.org/archives/economics_of_education/