Higher Education: The Next
Asset Bubble
By: Chandler Scott
Reference:
The article I read for
this blog is called, “Higher Education: The Next Asset Bubble.” It draws
parallels between how government policies allowed for loans that customers
couldn’t pay back caused the housing crisis in 2008 and how today similar
government policies are causing the same problem with tuition loans. These
student loans have increased the tuition price in the same manner the real
estate market increased when the housing bubble was occurring. There are lower interest rates on student
loans due to the government policies. Everyone is, in turn, guaranteed tuition with
a low interest rate if qualified for government loans.
When people default on
student loans, the government pays the loan to the college for the student. So,
regardless if the student actually pays the loan, the school gets the money.
Therefore, a college will not reject a student just because they have taken out
student loans; rather the student is more likely to be accepted. Due to this
reasoning, colleges are accepting more people into their school, which, in turn,
brings about a stronger demand for college after graduating for a job because
everyone who can will go to college. Because the demand for college rises, the
demand for more student loans increases and thus creates a vicious circle.
The student loans and
tuition rates are outpacing people’s income after graduating. This diminishes
the value of going to college and graduating with a degree because the price to
pay for college is so much greater than the return of income after graduating.
A strong debate of whether or not college is worth the investment is currently
happening in today’s society. However, another debate standing is that the
price to go to college isn’t as much of a determinant of whether or not a
person goes to college. Now, college is seen as a necessity to be able to get
even a decent paying job. The banks are giving out loans that take advantage of
the people trying to go to college because they know this is the issue.
The price to attend
college is rising so much because of the federal loan and grant money. Over the
past 40 years, the cost of private colleges has increased by 13 fold. Income,
however, has only grown at half that rate. So the amount to go to college has
double compared to the rise in income over the past 40 years. For example, in a
study performed in 2010, undergraduates owe approximately $20,000 in student
loans, but only 45% of college graduates from the class of 2009 earned less
than $15,000 in 2010. So the graduates earned less in one year than the total
of their debt they owe. Interestingly enough, the student loan has out paid
credit card debt and 25% of all loans given out at 4 year schools are defaulted
on. Another parallel compared to student loans is that they are defaulting
faster than home loans at the height
of the crisis in 2008. Also, filing for bankruptcy can’t dissolve student debt,
nevertheless, there are only two other scenarios where a person can’t get out
of debt: debt from a criminal act where you owe someone monetary restitution
and debt from fraud. Comparing student
loans to two criminal acts and categorizing them in the same way seems unjust.
Dr. D’Amico stated in
the article that the difference between the housing and tuition parallel was
that the housing bubble popped and fell drastically while the tuition rates
might just stagnate. This means that the tuition rate would eventually just
reach a height where it won’t be able to go any higher because people will just
reject it.
In simple terms, with a
four-year college education, a person can expect debt after taking out student
loans because they, more than likely, will not be able to repay the loans
within the first year of working after graduating. However, if a person does
not go to college and get a degree, it would be very hard for him or her to get
a well paying job out of college. It seems like a lose-lose.
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