Ever since the financial crisis, Americans have begun to see bubbles everywhere they turn. The damage wrought by the real estate bubble has been so extensive that the nation is rightfully terrified that another asset bubble is inflating beneath our noses, preparing to wreck the American economy at the drop of a hat. Bubble-phobia has now become issue number one for those who reject Ben Bernanke’s aggressive regiment of monetary stimulus, as they think it may be inflating bubbles in everything from real estate to Treasury bonds. But for frothophobes, the most dangerous bubble going today is in higher education. Don’t believe me? A quick Google search will reveal hundreds of stories foretelling of a crisis when the student loan bubble finally bursts. But let’s get a grip. When you take a closer look at higher education, you realize that while we do indeed have some problems to address, a bubble situation it is not. Here’s why: 1. The primary issuer of student loans is the federal government. The classic definition of a bubble is when the market value of a specific asset becomes unmoored from its true “fundamental” value, encouraging further price appreciation until the process becomes unsustainable and precipitates a crash. This is exactly what happened in the real estate market in the 2000s, as both lenders and borrowers were convinced that real estate prices would rise perpetually. (MORE: 10 Tips for Getting the Most Out of College Financial Aid) The thing is, the student loan industry can’t crash, pop, fizzle, or otherwise suddenly deflate because the Department of Education backs at least 85% of all student loans. Of the remaining loans that are privately issued, 90% have cosigners. On top of that it’s nearly impossible for student loan debt — whether owed to the government or to private lenders — to be discharged during bankruptcy. The upshot is that rising delinquency and default rates on student loans, while troubling in many respects, are simply not a serious danger to bank balance sheets and therefore are not going to cause a banking crisis![]()
