We are in something of a crisis, although a frequently overblown one, when it comes to student loan debt. I have written at great length about ways both to lower the cost of college and to help those who are struggling under the weight of student loan debt. However, I firmly believe that this problem needs to be understood as a humanitarian one which has the chief problem of hurting people who don’t have to be hurt, and not as an asset bubble which could cause ripple effects that sink the rest of the economy.
I think the urge to call a student loan debt bubble is based on multiple factors. First, we have bubbles on the brain, for obvious reasons, and calling bubbles has become a hallmark of lazy journalism and commentary. Second, this is a favored argument of conservatives, and libertarians, who don’t like government subsidizing education and largely hate the professoriate and dislike what they perceive to be the politics of the university system. Finally, you get it from Gawker, which is always eager to call other people chumps, as part of its basic financial model which trades stroking its readership for clicks.
What contributes to conventional asset bubbles, whether they be in condos or tulips or stocks? There’s a few key factors that don’t apply at all to student loan debt. Assets in typical asset bubbles are transferable and they are appreciable and they are held by private entities.
Take the housing bubble. It’s the go-go 2000s. Financialization has attracted a massive amount of investment capital. Why? Because rates of return are so high. Why? Because you can speculate, in part. What can you speculate on? You can speculate on assets that can appreciate and that can be transferred. So take a house and a mortgage. I’m Joe SubPrime. I want to buy a house. The mortgage company is hungry for more business, as is the bank that buys the loan as part of a big CDO, as is the hedge fund that wants to make bets about the value of that CDO. Everybody wants me to get the house, so I do. Being SubPrime, I can’t actually afford to pay the mortgage. But, crucially, the mortgage is backed by the collateral of the house, an asset which can appreciate itself. There is a value to the collateral, in other words, that is independent of the value of the loan. This is supposed to make mortgages safer for the banks than unsecured debt like credit card or student loan debt, where the only enforcement mechanism is the negative impact on a borrower’s credit report.
But, as we know, in practice the collateral of the physical property made mortgages far riskier. Because the value of the real estate kept going up, borrowers could keep refinancing their loans (and often, their lifestyles). And in the event that someone did default, the banks could take their real estate at a time when that was a valuable asset. Everything was groovy, save for those poor squares who got predatory loans they couldn’t afford, as long as everybody believed that housing values could only go up. For as long as housing prices were rising, the bubble expanded and expanded and expanded….
That, really, is the fundamental bubble mechanism that cause the financial crisis, the (bizarre in hindsight) conventional wisdom that housing prices couldn’t go down. Once it became clear that housing was overvalued in some places, it punctured the market and brought prices down almost everywhere. That meant that individual borrowers now couldn’t refinance to stay ahead of their payments, which led them to default, which pumped the now-cratering housing market full of foreclosures, left in the hands of banks who couldn’t sell them and who suddenly had previously-valuable CDO assets reduced to nothing, causing banks to approach failure, forcing them to discontinue their normal operations like lending to businesses, which forced those businesses to downsize dramatically or fold altogether, sending millions into the job market and dramatically slowing the growth of our economy.
The basic mechanism, in all of this, was based on the misconception that the collateral associated with the mortgages could not depreciate. In other words, the housing bubble was just that, a bubble in housing and not in mortgages.
Now take my (Joe SubPrime’s) student loans. I take out loans to go to college. The loans are guaranteed not by a private entity but by the federal government. The value of the loan is what it is– the principle and the interest. There is no asset that can appreciate independent of the principle and the interest. There is no collateral, and there is nothing that can be transferred; you can’t sell your diploma. There’s no speculation possible on the value of the education; whether I get a job or not, the loan is worth what it’s worth.
So I graduate from college and, in the face of an employment depression, I find myself unable to get work. It’s not a matter of my choosing an “impractical” major, as there is no evidence that our current employment woes are structural, despite the constant claims otherwise. But no matter; I can’t get a job. It sucks. I negotiate for awhile with the Department of Ed collectors, who are well-known for being flexible, but it’s no use. I default on my loan. What happens?
Well, my credit score gets hit. It gets harder for me to get a credit card or car loan or to rent a new apartment. I get a lot of notices and letters. Life is very tough for me. And… that’s pretty much it, as far as greater exposure goes. The “asset” that I bought with the loans, my education, isn’t transferable and isn’t secured against anything but my credit score. The lender is thus not left with closets full of useless education, the way they were left with lots full of empty houses. The value of the loan was never pumped up to grotesque proportions by speculators and irrationality, the way housing values were; the best the loan was ever going to return was the principle and interest. And for the vast majority of the debt out there, the lender is the federal government, which is not going to vanish overnight the way that Bear Stearns did. If the government ends up with a bunch of unpaid loans, the consequence will be… that it runs at a deficit as it always does. Given that student loans are not dischargeable in bankruptcy, it can always collect as much as it can, and it has the benefit of endless time.
Yes, it is entirely possible for the investment of a student loan to not pay off for the student or for the lender. But that does not mean that we’re talking about a “bubble.” If we call it a bubble every time an investment does not return as the investor hoped, the term has no meaning. What could be inflating? The perception of the value added to a person’s earning potential by his or her degree? Sure, people can overestimate that– but I must continue to note that the college wage premium and employment advantage remains robust, and for most borrowers, will mean that their investment returns dramatically more in compensation than they make in payments, over their lifetime. (Particularly for the poor, and even for those whose jobs don’t require the degree.) But even if people overvalue the financial aspects of a degree, so what? That isn’t and can’t be reflected in the value of the loan itself. The loans have a fixed value; they can’t inflate. You can’t speculate on an asset which can’t appreciate in value. That is a problem. It is not a bubble.
I don’t doubt for a minute that bankers can find arcane methods to securitize private loan debt, and that they could do what bankers do and implode. But the scale we’re talking about is vastly different here. The median student debt countrywide is $12,500. 43% of borrowers have less than $10,000. And 34% of graduates in the class of 2008 had no student loan debt at all. Are these numbers indicative of a problem? They are. Is that problem anything like the size of the mortgage crisis? It is not. What’s more, again: the numbers, beyond the hype, say that college is a great investment, with an annual rate of return of over 15%. And with the government guaranteeing a significant majority of the extant debt, the chance of an economy-wide contagion like the one that struck with housing is much, much smaller. Immaterial assets that can’t be transferred simply have far less ability to create disastrous bubbles in the typical sense. Our media keeps overselling this problem, and they are doing it for a reason. Whenever I read articles calling student loan bubbles, I look for the part where they express the actual mechanism through which the supposed bubble will pop. It’s never there.
I hope it’s perfectly clear that this isn’t an endorsement of the status quo; far from it. (Of course I’m sympathetic towards people struggling with student loan debt; I’m one of them!) Like so many of our current problems, this one could be fixed if we had better priorities and a dedication to reducing harm. I do agree that college is not for everyone, but why do so many pursue a college education? We created the conditions we’re in not by being too generous about college lending but by destroying the value of our own uneducated workers. The neoliberal policy apparatus directed us to undermine our uneducated workers in manufacturing and similar fields, cutting the legs out from under those workers and compelling them to go to college. Our system of higher education now struggles to educate an entire nation into prosperity, a role for which it was never designed. Those struggling without jobs and with college loan debt deserve our material support, but they are part of a fundamentally flawed system that requires serious and widespread overhaul. We need to rebuild wages for uneducated labor by reinvigorating unions, by protecting them through the enforcement of existing labor law and the creation of new. And we need to keep a viable and cheap public option alive through public universities.
If you are worried about bubbles or concerned for the human suffering, the fix is clear: forgive all the federal debt. It’s an incredibly easy stimulus to implement, and it would put money into the hands of exactly the kind of upwardly-mobile young people who would spend it on housing, cars, and material goods, which would provide a major stimulus to the economy and in so doing improve the lot of the worse off. Yes, I am concerned about targeting what is still a privileged class for relief, but they are suffering, and this could be packaged with more social programs for those at the bottom. And if you want to call all that debt a bubble, despite everything, then student loan forgiveness would let all the air out, productively, before you have to fear a pop.