Tags: Packer | student | loans | default

The Bubble in Education Is Finally Bursting

Tuesday, 02 Oct 2012 07:38 AM

By Andrew Packer

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The U.S. Department of Education reported on Friday that 13.4 percent of student loans are in default. That’s $122 billion of the $914 billion in student loans due to the government.

What’s interesting about this default rate is that it mirrors the percentage default rate of subprime mortgages in 2007. As that high rate was being digested, panic in the market ground financial markets to a halt.

Frankly, I think the word “bubble” has gotten thrown around far too much since the financial crisis. But, in the case of student loans, it would seem to apply.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

There’s almost a trillion dollars in loans outstanding for education, and it’s going bust. In retrospect, it makes sense why tuition is one of those items that consistently rises faster than the rate of inflation. (Only health care rises at a faster rate.)

It also makes one wonder about the sustainability of today’s post-high school educational system.

Unlike the subprime mortgage fiasco, which at least saw people buy homes they couldn’t afford, we’re now dealing with individual educations. That’s a very subjective asset. But, at its core, the big difference is that lenders don’t have anything tangible to foreclose on.

In some cases, you might have defaulting students who don’t even have degrees. Or their expensive educations went into areas where there are simply no jobs to be had. Student loans might make sense in areas where America is deficient in jobs, like post-graduates and doctorates in the hard sciences. But do we need another English major? Maybe at your local Starbucks, but not mine.

Debt, like money, is neither good nor bad. It’s how it’s used. In the case of debt, it can be used to buy productive assets like homes, businesses and cars.

Of course, debt can be used to buy those assets only to discover that they’re not productive. That happens.

Capitalism operates a lot like the scientific method. Either results follow along with your initial hypothesis or they don’t. Unlike a pristine laboratory, however, real failure has real consequences. People who couldn’t afford a mansion faced foreclosure. Students who can’t get a job still have to find a way to pay back that debt.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

And to those who complain that you need a good education to get a good job, I’d like to remind you that such a claim just isn’t so.

A few months back, I had to shell out a few hundred bucks for less than an hour’s work from a plumber. He didn’t get a fancy degree after high school, he just went to work in an industry that pays well and always has demand.

Now we’re faced with a huge drag on the economy. Student loans are yet another government program to loan people money at preferential rates to buy something they shouldn’t have been paying so much for in the first place.

While many private lenders made bets on college, ultimately taxpayers are on the hook should defaults get worse.

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