[JonFish85]

To me, this is another implementation of the housing bubble:

- People see college graduates making a lot of money

- Politicians make it a priority to make it easier for people to get loans to go to college

- More people take out loans to go to college

- Colleges realize there is no downward pressure on price and raise tuition.

- Politicians continue to make it easy for people to go to college

- People take bigger loans to go to any school they wish

Until the music stops, things are sort of OK. People's kids can go to any school they can get into, regardless of cost. Colleges can raise their tuition with no consequences.

Politically it's a difficult problem, because the old solution of making more money available is getting out of hand, but what politician wants to stand up and tell people they can't go to the college of their dreams just because they can't afford it?

During the housing bubble, it was the cycle of "people want to own a home" => "politicians say everyone should be able to own a home and make loans available" => "companies make money packaging up these loans" => "prices go up" => "people can't afford homes" => "politicians make more money available". Until the music stops, everything is great -- everyone is making money, everyone is getting what they want. Then it unravels...

[mattmanser]

The thing I don't understand is, how does it unravel?

It feels like politically acceptable short-termism of shunting education costs onto future generations. No-one's going to 'lose' money over it. Who will suffer? It doesn't look like it will be corporations that will suffer, save some institutions will close when the endless supply of money suddenly dries up. It looks to me like it will be governments, a political ticking time-bomb much worse than the growth of numbers of pensioners vs number of workers. Is it a potential social disaster where a lot of people will end up sent to a new version of debtors prison for a bit? Or will it massively impact future GDP of developed countries, as people won't be able to spend, they'll be paying back this onerous loans. Having the exact opposite effect that it's supposed to, instead of growing GDP by growing skills, it'll be killing it by curtailing worker spending potential. Tax revenues might fall due to higher education instead of grow.

Governments seems to be making these student loans rock-solid backed by government assurances to the detriment of future generations.

I haven't looked into it enough to know and am lucky enough to have paid all mine off as it was much smaller than today's crazy amounts.

[dv_dt]

It unravels because it's one of many systematic cuts taking wealth out of the hands of the middle and lower classes. Income after graduation is routed back into the student loans instead of going into savings (and getting max compounding early on), or going into the economy (giving steam to GDP..). Will it the straw that breaks the back of our current economic expansion? Or will it combine with current tax cuts to pull so much money out of "main stream" economic circulation that we hit another recession? I'm not sure anyone really knows.

[dnadler]

Yeah, as you say, it's not really a traditional "bubble".

From what I can tell, a few entities will suffer, but not in a spectacular fashion.

1. The government may be forced to forgive a lot of debt, thus taxpayers will suffer.

2. Those making whose student debt payments are not proportional to their income will be an economic drag on the US.

So there is no "bubble" to "pop". Rather, it looks like it's going to be a long-term economic drag on the country.

[hkmurakami]

iirc 1 is already happening, as more loans "than expected" (roll eyes) are delinquent.

[linkregister]

I think it unravels over time. The feedback loop is very long.

At some point, large amounts of young adults will accept loans that exceed the value-add of college by a significant amount. Then, those who chose not to attend college and pursued a trade will be more visibly affluent. The trend will swing the other way, universities will experience downward pressure on tuition, and trade schools will be inundated as universities are now.

Until there is a political solution, I don't see how the cycle rights itself.

Maybe better information dissemination will give young adults more ability to make the rational choice whether or not to get large loans (or what amount of loans to get). Until then, the feedback loop is too long. Furthermore, for those who chose wrongly, there's no remedy. It's a bad situation.

[rsa4046]

Man, what an interesting discussion, and a lot of good points here. As someone involved in education in US (research faculty at major private school in the South), and more recently, in Germany, I've become increasingly concerned with the large number of students graduating these days with bachelor and graduate degrees with little hope of employment, holding huge debt they have scant chance of paying off in any short time frame. This hobbles them severely. More and more I start to wonder if we could not accomplish more by shifting much of burden of instruction in all fields (arts, sciences, language, etc.), back to high school, rather than impoverishing students and loading them with college debt so early in life. Student Loan program seems to mostly be a way to transfer wealth from taxpayer to universities and of course the banks, but not necessarily producing a broadly educated populace. Agree with above comment that running education as a "business" with students as consumers produces a terrible result.

[linkregister]

Agreed, having mandatory Physics and Chemistry classes seemed wasteful to me. I enjoyed them immensely, and I would have taken them as electives.

Most of my classmates didn’t get much out of them, and would have done better with personal finance classes or other practical classes instead.

For the time being, all but two or three college majors (zoology, social work, sadly enough) are still cost-effective over a lifetime, given the median undergraduate student loan amounts. This gap is closing however.

Trades shouldn’t be considered a complete panacea, pay varies widely by regions. Some trades only pay well in one or two places.

[workthrowaway27]

But as far as I know student loans aren't securitized and leveraged in the same way as mortgages were, so I'm not sure that the fall out will be as bad.

The root problem (as others have noted) is too many people are encouraged to go to college and even though most majors don't make economic sense students (rightly) feel that they need a college degree to be a competitive applicant for good jobs. Maybe I'm just in an ideological bubble, but it seems like there's pretty good agreement on this issue, but no real way to do anything about it.

[berbec]

They aren't securitized the way mortgages were, but you also can't walk away. Student loans are immune to bankruptcy so it follows you forever.

[mattbrewsbytes]

That is the major difference, mortgages had people underwater on actual physical things like property. They would go bankrupt and foreclose which would have a domino effect on other things.

Student loans are ignored in bankruptcy and there is no domino if they fail to pay since a degree isn't transferable to another person.

If there were to be a bubble burst, the people impacted are those that can't pay loans back and the institutions that handed out the loans. Sure there could be a backlash but a lot of those loans are from the Fed, right?

[berbec]

I'm not certain, but I believe they are backed by the fed, but issued by private lenders.

Any HNers currently in college? Is your loan from a federal institution or a private lender?

[workthrowaway27]

Right, and that doesn't seem good to me, but I don't think the fallout from student loans will be anywhere near the fallout from defaulted mortgages in 2008ish because they just aren't as as levered.

So it's terrible for the people involved, but not directly bad for society as a whole (but probably still bad in its second and third order consequences).

[berbec]

I'd say it's less bad for the people involved - it "only" trashes their credit. It makes life difficult, for sure. I'm sub-400 I believe. But a mortgage foreclosure trashes your credit and you lose your home. I /just/ need to come up with 12 months security, so I essentially can never move.

[speby]

> Politically it's a difficult problem, because the old solution of making more money available is getting out of hand, but what politician wants to stand up and tell people they can't go to the college of their dreams just because they can't afford it?

Presumably the same politicians that were around when foreclosure mania (a la 2008) occurred and ultimately were forced to change regulations that now make it much more difficult to get away with issuing subprime loans. Or in your line quoted above, substitute "college of their dreams" with "home of their dreams." The net effect, of course, is that those politicians are now telling people they can't get the home of their dreams because, gasp, they can't afford it.