Along the same lines, there is no incentive or ability to buy an extra degree in Vegas, Phoenix, or Miami, just because prices are going up there.
The real damage done to the economy by the mortgage bubble wasn't all of the people who lost money on homes when prices collapse. The most damage was due to the effect it had on banks' balance sheets when their assets (the value of debt-backed securities) lost value, which meant they had to call loans and restrict credit to make up for the difference. In that sense, a bursting of the student loan "bubble" could also have damaging effects on the economy.
When there's a decrease in the loans going out, there's a decrease in the demand for education services causing a reduction in the quantity available.
Repossession isn't a necessary condition for something to be in a bubble. Pulling demand forward and using laws/regulations/programs to funnel money into certain parts of the economy is what causes bubbles.
If student loan debt were bankrupt-able, and the degree revoke-able, I can see how that might remove some current problems (not that it wouldn't introduce others).
Student loans are not excluded from discharge if excluding the debt would "impose an undue hardship on the debtor and the debtor's dependents".
So it only requires a small attitude change of judges for the bank's assumption that non-repayment is impossible to blow up. Given the attitude changes towards student debt that are occurring in the papers, can this really be that far behind ?
The point here is that banks are starting to get it. Just because you can't walk away from student loan debt doesn't mean you have to pay it. Sometimes the numbers just don't work out. The odds of someone with 400k in student loans from a PhD in Philosophy paying them off in a lifetime with their job is a barista are very low.
Student loans are so cheap that the marginal impact of such a burst really only stands to impact greater lifetime earning potential of two distinct groups of the population: pre-poppers and post.
While that's unfortunate for the pre's, it's hardly comparable to the economic divide that has grown between the educated and uneducated classes.
For example, say you go to top elite 4-year liberal arts college and receive a degree in gender studies dropping $40k a year. Is that really worth $160k + interest for you? If the perceived value of the degree is substantially lower than expected, you mostly likely wouldn't want to pay back the loan. Consider this sort of scenario for tens of thousands of people. Banks that were expected to get the money back will be left with tons of debters just defaulting on their debt. Principles lost.
This is exactly what's going on. They're making the bet that they'll be in demand later and able to pay off their loans. Just like buying a house and being able to make money from it later. After all, everyone had a rationale as to why the price of their house would increase just like they do about the job market turning around for people with a degree/diploma in X.
Part of the collateral for student loans is, technically, your economic freedom. It's easier for banks to assume you will pay the principal of your debts, when government is the acting collection agency. It's very difficult to escape garnished wages.
However, if something changes and people have a way to shed their student loan debts, I think the bubble will pop very quickly.
Is this a reasonable bet to make? What is the earning potential of someone with a college degree? Isn't it something like a $1M+ increase over one's lifetime?
WSJ had article on student debt recently, with lots of data. Median debt load was 18-19k USD [1]
If it were all via Federal Stafford loan, the interest rate would be 3.9%. If the payback period was 10 years, the monthly payment would be a whopping $191 per month.
[1] http://online.wsj.com/article/SB1000142412788732443200457830...
I hate to be the bearer of bad news, everettForth, but this isn't going to be true much longer. (Something has to give, and this is what's going to give, I predict.)
What's really happened is that a college degree has been transformed into a very expensive writ of indenture that is required to get a job. This undermines the fundamental value not only of college but of the job itself. Why go to college to get a good job if a good job does not actually pay off in the end. You don't actually earn anything from the good job-- you just maybe make a dent in the writ of indenture you had to purchase to get it.
That's horrible. It undermines the entire economy. It undermines the entire reason for participating in the economy.
The problem is not the fact that the debt can be wiped, the real concern is that for some people the debt will not be repaid at all and they can't do anything about it. That debt, whether refinanced ( http://www.nbcnews.com/business/obama-signs-student-loan-bil... ) or wiped out, will make banks lose money.
Buckle up.
There are so many things wrong with the idea of a "bubble" popping. People can't walk away from student loan debt, like they can walk away from real estate debt. Interest rates are expected to rise, but only slightly with the 90-day T-bill yield. Not the insane rates 20% rates that banks were hitting people with in the subprime crisis.
People may find diminishing returns for college vs the rising costs, but that isn't the same thing as banks suckering people in with ARMs and then using leverage to make huge speculations on CDO's that lost 90% of their value.
Here's a madeup example from the subprime crisis. Someone puts $0 down and buys a $500k home with a loan from the bank. The bank expects to make $500k in interest over the lifetime of the loan due to ballooning interest. Now, let's say variable interest rates from the loan kicks in, and the person can no longer make his monthly payments.
In the past, when the real estate market was good, he could just sell the house for $600k, and keep a profit. But, lets say now the price of the home dropped to $300k. There is no way you are going to expect someone who put $0 down on a home he bought 2 years ago to cover $200k in debt for a home he doesn't even own any more due to foreclosure. So, now, instead of having something worth $500k in profit, the bank owns something that is a $200k loss.
Banks lost over a trillion dollars worth of assets in a matter of weeks.
Look at what was happening for years before the crisis though. In those times, it was very likely that a home could increase in value from $500k to $600k in a few years. How was that happening? A lot of it was because people figured out that they could put $10k down, and do this to make $100k, or 10x their investment in a few years. The true speculators are the people who just bought real estate only because they thought the price would keep going up. This in turn drives up the price without being tied to any kind of intrinsic value.
You simply don't have that kind of pure speculation in the college loan industry because you can't just buy and sell college degrees.
Also, people aren't just going to declare bankruptcy from their student loans in the same way as the subprime crisis because they legally can't. Wages can be garnished from student loans, and it's extremely hard to have the debt erased due to bankruptcy.
The "bubble" scenario is sensational, because everyone sees a trillion dollars evaporate in a few weeks. Instead, in the case of student loans, I think that we may see something just as bad for the economy, but it will happen over years, not weeks.
In a lot of ways, I think that's why this problem may be worse, because it may be just as bad, but much harder to notice than the subprime crisis. Journalists think that the only sign of economic failure is when a "bubble" pops though, which just isn't true. Slowed growth over 20 years could be just as bad if not worse.