STUDENT DEBT: America's Next Bubble? Forum

[scammedhard]

I like graphs. This one illustrates the magnitude of the problem. The housing bubble is a minor blip compared to what's happening in higher education.

http://media.economist.com/images/image ... NAC223.gif

[Samara]

Nice graph. However, scholarships and grants should be taken into account when comparing college tuition. Tuition has increased, but so have scholarships and grants, which just means that higher-income students are paying a greater share of the tuition. I wouldn't be surprised if tuition was still significantly higher, though.

The other thing to consider is that tuition is increasing faster because demand and consumption is increasing faster. More education creates a lot more wealth than higher housing prices do, so it's probably not as big of a deal. It's still a problem, but I have less pessimism about the overall negative effects of increased tuition than the housing bubble.

[rayiner]

Meh. It can't really de-rail the economy the way the housing bubble did. It will just be a major Federal budget headache.

It can and it will. An entire generation will spend most of their working lives under a crushing burden of debt, unable to afford things that the previous generation took for granted like buying a house/getting married/having children, etc...

A little inflation could ease the pain. Even absent that it is only life-ruining at outlier debt levels, and people who are that bad with money and planning for the future were probably going to find a way to financially ruin themselves anyway.

Absolutely. Most people don't have life-ruining debt, and it's a problem that can be solved via inflation.

The problem with the housing bubble wasn't all the debt. It was that all those mortgages were repackaged into AAA-rated financial products and when defaults rose and those financial products didn't perform like AAA products, expectations were massively upended. So far student loans have not been repackaged that way.

[violinst]

Most of the national debt is made up of Medicaid, Medicare, and Social Security so I doubt the student debt crisis will be of much to worry about. However, in the long run, student debt limits one's economic choices (mortgage/rent, used car/new car, etc.,) which might stall overall economic growth and leave America in the unemployment rut it's in.

Another point to consider is that employers will likely still use the bachelor's as a screening device. This is problematic because everyone in America is born thinking they can become "what they want" when the truth is most people's fate is decided by who their parents are and what they do. Thus, your average joe still will unlikely be able to consider the increasingly bad ROI on a college education and graduate with horrible debt and no job prospects.

Solution? Truly ask yourself if an education can help accomplish your goals and also realize that in life there are no certainties. As David Hume once said, "He is happy, whose circumstances suit his temper; but he is more excellent, who can suit his temper to any circumstances."

Edit: If you want to become a IB, consulting, work in national politics, or academia, the Ivy League is a must. If you want a regular job, the cheapest school possible in the region you want to work in is key; networking will be what sets you apart. If you want to become an artist, musician, or something creative for fuck's sake don't go to art school, the people I know even from the most prestigious art schools have a lot of debt and no job prospects (minus designers).

Give me one example where a famous classical musician did not attend or have masterclasses at a top conservatory.

The Ivy League is not a must for IB, consulting, work in national politics, or academia. There are still Stanford, Duke, Northwestern, top state schools (Berkeley, Michigan, UT, and even Ohio State), and top liberal arts colleges.

[swc65]

Why not education while we're at it? That would definitely help our budget deficit

God you are a retard. It's not education that is the problem, it's the government subsidization of it which is artificially inflating demand and prices which is at the root of the distortion, not education itself.

You know, if you're going to act like a know-it-all asshole about this issue, you could at least get the basic economics of it right. The government backing of student loans artificially increases the supply of higher education, not demand. This is why we have seen an expansion in the number of law schools specifically and for-profit/"non-profit" schools generally. It's the misrepresentation of employment statistics that artificially increases the demand for JDs. Normally, an increase in supply and an increase in demand would mean that prices remain stable. However, because of a dwindling of "substitute goods" for jobs requiring higher education (such as manufacturing jobs) and the high price inelasticity of demand for a JD, the price of a JD has increased much more quickly than inflation while consumption has also increased. The big problem then is that the number of people paying for a JD is far greater than the supply of JD-requiring jobs, which means that lots of people are saddled with debt they can't repay.

Elimination of government subsidies would not be the panacea you think it would be. It would decrease supply, but the high demand and high inelasticity would still be there. Plus, people would still acquire massive loans, just at increased costs through the private sector, further widening the gap between the haves and have-nots. There would still be too many people earning JDs. Probably the only feasible solution is to mimic medical schools and artificially restrict the supply by limiting the number of law schools and size of classes, so that the number of graduates produced is close to the supply of legal jobs. Greater transparency in employment statistics would help to decrease demand, but likely not by nearly enough to solve the problem.

So having access to unlimited capital to purchase a specific product does not increase demand and decrease elasticity for that product?

[rayiner]

I like graphs. This one illustrates the magnitude of the problem. The housing bubble is a minor blip compared to what's happening in higher education.

http://media.economist.com/images/image ... NAC223.gif

I'm sorry you had to go to law school because you can't do math.

Yes, student loan debt is growing faster than other kinds of debt. However the magnitude of student loan debt is still relatively smaller.

From: http://www.theatlantic.com/business/arc ... 99/243821/

Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

From: http://www.usatoday.com/money/economy/h ... oney_n.htm

The nation has slashed total mortgage debt from nearly $11 trillion at the mid-2008 peak to $10.3 trillion in the first three months of 2011, the BEA reports.

$550 billion versus $10,300 billion. It's student loan debt that's the minor blip.

Everyone with a student loan could suddenly default, and while it would hurt, the economy would survive. For comparison, Hurricane Katrina cost the US economy about $110 billion. If everyone defaulted on their mortgages, the economy would literally cease to exist.

[scammedhard]

The problem with the housing bubble wasn't all the debt.

True. Debt itself was not the problem. The problem was that excessive resources (i.e., credit, money) were wasted in an overpriced product (i.e., housing).

I am afraid that higher education is following the exact same path. It's not that education is bad or useless. The problem is its cost. For some majors, the cost is still justified considering the return of investment (e.g., computer science); for other fields, the cost is totally not justified considering the return of investment (e.g., art history). You can see that as well in legal education: NYLS and Harvard cost about the same; however, I think that one has a very positive return of investment, whereas the other is probably negative.

[monarchylover]

I like graphs. This one illustrates the magnitude of the problem. The housing bubble is a minor blip compared to what's happening in higher education.

http://media.economist.com/images/image ... NAC223.gif

The graph says absolutely nothing about a student loan "bubble" dumbass. Also, NO the housing bubble crippled the economy because it affected peoples retirement funds brought down entire insurance companies and destroyed towns. If your dumbass abandons payments on your student loans they will garnish your wages and tax returns. You can't just "walk away" from student loans like mortgages that destroyed entire communities including the businesses that resided in them...

[Samara]

Why not education while we're at it? That would definitely help our budget deficit

God you are a retard. It's not education that is the problem, it's the government subsidization of it which is artificially inflating demand and prices which is at the root of the distortion, not education itself.

You know, if you're going to act like a know-it-all asshole about this issue, you could at least get the basic economics of it right. The government backing of student loans artificially increases the supply of higher education, not demand. This is why we have seen an expansion in the number of law schools specifically and for-profit/"non-profit" schools generally. It's the misrepresentation of employment statistics that artificially increases the demand for JDs. Normally, an increase in supply and an increase in demand would mean that prices remain stable. However, because of a dwindling of "substitute goods" for jobs requiring higher education (such as manufacturing jobs) and the high price inelasticity of demand for a JD, the price of a JD has increased much more quickly than inflation while consumption has also increased. The big problem then is that the number of people paying for a JD is far greater than the supply of JD-requiring jobs, which means that lots of people are saddled with debt they can't repay.

Elimination of government subsidies would not be the panacea you think it would be. It would decrease supply, but the high demand and high inelasticity would still be there. Plus, people would still acquire massive loans, just at increased costs through the private sector, further widening the gap between the haves and have-nots. There would still be too many people earning JDs. Probably the only feasible solution is to mimic medical schools and artificially restrict the supply by limiting the number of law schools and size of classes, so that the number of graduates produced is close to the supply of legal jobs. Greater transparency in employment statistics would help to decrease demand, but likely not by nearly enough to solve the problem.

So having access to unlimited capital to purchase a specific product does not increase demand and decrease elasticity for that product?

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

[acapulco980]

Most of the national debt is made up of Medicaid, Medicare, and Social Security so I doubt the student debt crisis will be of much to worry about. However, in the long run, student debt limits one's economic choices (mortgage/rent, used car/new car, etc.,) which might stall overall economic growth and leave America in the unemployment rut it's in.

Another point to consider is that employers will likely still use the bachelor's as a screening device. This is problematic because everyone in America is born thinking they can become "what they want" when the truth is most people's fate is decided by who their parents are and what they do. Thus, your average joe still will unlikely be able to consider the increasingly bad ROI on a college education and graduate with horrible debt and no job prospects.

Solution? Truly ask yourself if an education can help accomplish your goals and also realize that in life there are no certainties. As David Hume once said, "He is happy, whose circumstances suit his temper; but he is more excellent, who can suit his temper to any circumstances."

Edit: If you want to become a IB, consulting, work in national politics, or academia, the Ivy League is a must. If you want a regular job, the cheapest school possible in the region you want to work in is key; networking will be what sets you apart. If you want to become an artist, musician, or something creative for fuck's sake don't go to art school, the people I know even from the most prestigious art schools have a lot of debt and no job prospects (minus designers).

Give me one example where a famous classical musician did not attend or have masterclasses at a top conservatory.

The Ivy League is not a must for IB, consulting, work in national politics, or academia. There are still Stanford, Duke, Northwestern, top state schools (Berkeley, Michigan, UT, and even Ohio State), and top liberal arts colleges.

When I say musician, I mean indie rock type people. Also, I have a bad habit of considering the schools you mentioned as Ivy League (those schools are Ivy League caliber to me).

Anyways, basically going to the local commuter college is not going to land you a job in the above areas is what I want to get at.

[Samara]

The graph says absolutely nothing about a student loan "bubble" dumbass. Also, NO the housing bubble crippled the economy because it affected peoples retirement funds brought down entire insurance companies and destroyed towns. If your dumbass abandons payments on your student loans they will garnish your wages and tax returns. You can't just "walk away" from student loans like mortgages that destroyed entire communities including the businesses that resided in them...

Umm...wut? I think you're conflating the housing price bubble with Wall Street credit default swap practices.

[rayiner]

The graph says absolutely nothing about a student loan "bubble" dumbass. Also, NO the housing bubble crippled the economy because it affected peoples retirement funds brought down entire insurance companies and destroyed towns. If your dumbass abandons payments on your student loans they will garnish your wages and tax returns. You can't just "walk away" from student loans like mortgages that destroyed entire communities including the businesses that resided in them...

Umm...wut? I think you're conflating the housing price bubble with Wall Street credit default swap practices.

They're linked. The dip in housing prices wouldn't have been nearly as damaging if it hadn't totally upended the expectations embodied in the financial instruments tied to them.

[monarchylover]

The graph says absolutely nothing about a student loan "bubble" dumbass. Also, NO the housing bubble crippled the economy because it affected peoples retirement funds brought down entire insurance companies and destroyed towns. If your dumbass abandons payments on your student loans they will garnish your wages and tax returns. You can't just "walk away" from student loans like mortgages that destroyed entire communities including the businesses that resided in them...

Umm...wut? I think you're conflating the housing price bubble with Wall Street credit default swap practices.

please edjumacate yourself on CDSs http://en.wikipedia.org/wiki/Credit_default_swap the CDS's backed the bad mortgages so when they defaulted the CDS's were suppose to cover the default as a type of insurance which AIG held a shit ton of which they did not have the funds to cover.

[Tiago Splitter]

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

You've stated that the elasticity wouldn't change, but if the government got out of the education business elasticity would most certainly increase. Otherwise the only conclusion one can make from your logic is that the schools could continue to raise tuition with impunity.

[Samara]

The graph says absolutely nothing about a student loan "bubble" dumbass. Also, NO the housing bubble crippled the economy because it affected peoples retirement funds brought down entire insurance companies and destroyed towns. If your dumbass abandons payments on your student loans they will garnish your wages and tax returns. You can't just "walk away" from student loans like mortgages that destroyed entire communities including the businesses that resided in them...

Umm...wut? I think you're conflating the housing price bubble with Wall Street credit default swap practices.

please edjumacate yourself on CDSs http://en.wikipedia.org/wiki/Credit_default_swap the CDS's backed the bad mortgages so when they defaulted the CDS's were suppose to cover the default as a type of insurance which AIG held a shit ton of which they did not have the funds to cover.

I understand that, but, arguably, the housing bubble popping would not have had the massive deleterious effect you cite if it had not been magnified by CDS practices. Student loans are not linked to CDS or any other practices. Therefore, you can't make the comparison you make. Because mortgages were also highly leveraged by the government through Fannie Mae and Freddie Mac, we probably can see what kind of effect a student loan bubble would have by looking at the housing bubble divorced from the CDS effects. That's certainly difficult to do, but we can probably learn a lot by trying.

[Samara]

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

You've stated that the elasticity wouldn't change, but if the government got out of the education business elasticity would most certainly increase. Otherwise the only conclusion one can make from your logic is that the schools could continue to raise tuition with impunity.

That is the conclusion I would make. Schools are raising tuition at a crazy rate and it doesn't seem to have any significant effect on consumption. The elasticity is determined by what applicants think they can get from acquiring a degree, i.e. future earnings and such, not the price of borrowing.

[swc65]

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

I am pretty sure you have it backwards. The coupon is a subsidy which shifts the demand curve. It is not you that is the issue. It is the marginal consumer who would not have purchased the movie at 10 but will now purchase it at 7 with the government coupon/subsidy.

The supply curve does not shift but the equilibrium quantity and price increase as the number of tickets consumed at any given price increases. Increasing supply would decrease prices, not increase them by shifting the supply curve down.


Student loans are direct subsidies. They lower the cost of education (price+cost of capital) and increase consumption of education at any given price. Without government guarantees, the cost of loans would be much, much higher for people who are unlikely to be able to pay them back. So the loans are like those coupons you mentioned- direct subsidies. Direct subsidies to the consumer shift the demand curve. Loans to students do not increase supply, it increases demand. The supply curve staying the same is what increases the price when demand shifts.


There are certainly many government subsidies to suppliers of education, but student loans are in that group.

[Tiago Splitter]

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

You've stated that the elasticity wouldn't change, but if the government got out of the education business elasticity would most certainly increase. Otherwise the only conclusion one can make from your logic is that the schools could continue to raise tuition with impunity.

That is the conclusion I would make. Schools are raising tuition at a crazy rate and it doesn't seem to have any significant effect on consumption. The elasticity is determined by what applicants think they can get from acquiring a degree, i.e. future earnings and such.

Agree to disagree here. If government stopped guaranteeing loans law school applications would drop drastically if the schools kept the tuition at 40-50K.

[swc65]

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

You've stated that the elasticity wouldn't change, but if the government got out of the education business elasticity would most certainly increase. Otherwise the only conclusion one can make from your logic is that the schools could continue to raise tuition with impunity.

That is the conclusion I would make. Schools are raising tuition at a crazy rate and it doesn't seem to have any significant effect on consumption. The elasticity is determined by what applicants think they can get from acquiring a degree, i.e. future earnings and such, not the price of borrowing.

It is both. because the cost of loans does not shift with the price of education (as it would in a normal market since the risk of default increases), the elasticity is less than it otherwise would be.

[Samara]

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

You've stated that the elasticity wouldn't change, but if the government got out of the education business elasticity would most certainly increase. Otherwise the only conclusion one can make from your logic is that the schools could continue to raise tuition with impunity.

That is the conclusion I would make. Schools are raising tuition at a crazy rate and it doesn't seem to have any significant effect on consumption. The elasticity is determined by what applicants think they can get from acquiring a degree, i.e. future earnings and such.

Agree to disagree here. If government stopped guaranteeing loans law school applications would drop drastically if the schools kept the tuition at 40-50K.

Ending the subsidy practice would decrease applications (consumption) because the costs of borrowing would go up, not because elasticity would change. I agree with you that they would drop, but I think it would be a small decrease because the private sectors would supply the loans, just at an increased cost (interest rate).

[Tiago Splitter]

Ending the subsidy practice would decrease applications (consumption) because the costs of borrowing would go up, not because elasticity would change. I agree with you that they would drop, but I think it would be a small decrease because the private sectors would supply the loans, just at an increased cost (interest rate).

What idiot in the private sector would make a loan at any interest rate to send someone to a fourth tier school for 200K?

The elasticity would change because consumers would have a tougher time getting loans as costs increased. Right now, I can get loans guaranteed by the government for 70K a year, but if tuition goes up, the loan amount goes up. This wouldn't be the case in a normal market. Eventually the lender would shut off the spigot, but now he doesn't have to, so the elasticity is all out of whack.

[swc65]

Ending the subsidy practice would decrease applications (consumption) because the costs of borrowing would go up, not because elasticity would change. I agree with you that they would drop, but I think it would be a small decrease because the private sectors would supply the loans, just at an increased cost (interest rate).

What idiot in the private sector would make a loan at any interest rate to send someone to a fourth tier school for 200K?

The elasticity would change because consumers would have a tougher time getting loans as costs increased. Right now, I can get loans guaranteed by the government for 70K a year, but if tuition goes up, the loan amount goes up. This wouldn't be the case in a normal market. Eventually the lender would shut off the spigot, but now he doesn't have to, so the elasticity is all out of whack.

Exactly.

[Samara]

Ending the subsidy practice would decrease applications (consumption) because the costs of borrowing would go up, not because elasticity would change. I agree with you that they would drop, but I think it would be a small decrease because the private sectors would supply the loans, just at an increased cost (interest rate).

What idiot in the private sector would make a loan at any interest rate to send someone to a fourth tier school for 200K?

The elasticity would change because consumers would have a tougher time getting loans as costs increased. Right now, I can get loans guaranteed by the government for 70K a year, but if tuition goes up, the loan amount goes up. This wouldn't be the case in a normal market. Eventually the lender would shut off the spigot, but now he doesn't have to, so the elasticity is all out of whack.

Sure, some loans wouldn't be made, but many of them still would, just at really high interest rates. People still buy junk bonds and all kinds of high-risk investments.

[Samara]

Ending the subsidy practice would decrease applications (consumption) because the costs of borrowing would go up, not because elasticity would change. I agree with you that they would drop, but I think it would be a small decrease because the private sectors would supply the loans, just at an increased cost (interest rate).

What idiot in the private sector would make a loan at any interest rate to send someone to a fourth tier school for 200K?

The elasticity would change because consumers would have a tougher time getting loans as costs increased. Right now, I can get loans guaranteed by the government for 70K a year, but if tuition goes up, the loan amount goes up. This wouldn't be the case in a normal market. Eventually the lender would shut off the spigot, but now he doesn't have to, so the elasticity is all out of whack.

I was always really bad at elasticity and it's been a while, but I don't think the costs affect the elasticity. http://en.wikipedia.org/wiki/Price_elasticity_of_demand Maybe it would be affected under percentage of income, but because it's so much larger than an applicant's income I don't think it would really matter.

[Blessedassurance]

Yep, that's how demand works. If I'm willing to see one movie per month at $10/ticket and two at $7/ticket, and the government gives me a $3 coupon, I'll see two movies instead of one and more movie theaters will open. My consumption changed, but my demand curve didn't. If studios misrepresent how good their movies are, I'll want to see two movies at $10 and three movies at $7, thus changing my demand curve.

Producers enter the market to take advantage of the increase in price due to the increase in demand.

The problem with government subsidization is that it creates demand where none would have existed. The increase in demand relative to supply causes a rise in tuition and the proliferation of producers at the new higher equilibrium which further creates an increase in supply of JD-holders relative to demand of labor which drives down price to a lower equilibrium (and unemployment).

The availability of alternate means of financing which you speak of is also a consequence of governmental interference to the extent that the loans are non-dischargeable.

All this analysis of a bubble-burst requires the participation of rational , informed agents and viable substitutes, rendering the point moot. The educational bubble is not going to burst anytime soon. Cooley will continue to meet its quota, JDU notwithstanding (snowflake syndrome, knowing an employed Cooley grad etc). The government can quit subsidizing education but that will open up a whole new pandora's box. The onus is on the ABA to restrict the supply of JD-holders in a manner similar to the AMA but that also involves trade-offs.