The 2008 recession can teach us a lot, but many Americans refuse to take the time to learn. It's not rocket science.
If you've turned on the news in the last three years or heard someone rant about the 2008 fiscal crisis, you probably heard some very abstract anger toward "big banks" or greed. These arguments are similar in some ways to saying water is wet. Yes, these things exist. That doesn’t explain why they’re so horrible, though.
Normally, greed creates incentive for big banks to make good loans — that is, banks make loans to people who can afford to pay them back. As a result, big greedy banks get their money back with interest.
So why did banks make bad loans that resulted in the housing collapse? There were countless factors at play, but when you boil it down to the core, you find the implicit guarantee the government would bail out failing banks, especially Fannie Mae and Freddie Mac, was the driving force, which altered incentive.
The precedent was set several years ago under the Greenspan era of the Federal Reserve in an attempt to limit losses. The intentions were good, but this opened up the floodgates for more recklessness, as most well-meaning government policies do. That is, no rational person would give someone with an astoundingly low credit rating a mortgage that jumps from 3 percent to 8 percent after two years. Regardless, when banks were given the ability to package these mortgages and sell them to larger banks, why wouldn't they? It's a win-win situation, except for the people bailing the banks out.
The implicit guarantees on these banks appeared to work at first. The housing market looked great, and the price of houses did as well. Unfortunately, though, as with all other artificial stimulants, the high doesn't last forever.
Since you’re reading this, you’re probably going to be at MU this August. Congratulations! That means you’re a part of the latest and greatest financial bubble!
College is a great excuse to move out on your own, learn a lot (or a little), have a lot of fun and generate mountains of student debt. When you leave, your finances will look like you just recovered from a gambling addiction. However, unlike a gambling addiction, the school will give you a piece of paper that some employers might or might not care you have. It’s fun, right?
The student loan bubble, not unlike the housing bubble, is the result of a large misallocation of resources. College tuition hasn’t just increased at the same rate as other prices — it has taken off like a rocket. In fact, the cost of tuition and fees at an average four-year public school has risen by 150 percent to an average of $8,244 per student since 1990, according to the Wall Street Journal).
Why is this explosion of tuition occurring? You guessed it — the government altered the incentive! By giving out student loans to everyone and his cousin, Uncle Sam made cash for tuition a lot easier to obtain. Who cares if my tuition is $35,000 a year if my Pell Grant covers $15,000 of it and my student loans get another chunk (for now, anyway)?
Now that students can access ridiculous amounts of money and justify the expense of college because it’s going to “help” them get a job, what would any rational institution do in reaction to this artificial increase in demand? That’s right, raise prices!
Greed isn’t the problem. Educational institutions aren’t the problem. Misplaced incentives are the problem. As long as the federal government makes more cash available for student loans, college tuition will increase and more semi-useless institutions will spring up.
The housing bubble was dangerous. Millions of retirement plans hung in the balance. But the student loan bubble might be even more dangerous. If the bank making the loans collapses this time, the government won’t be able to bail it out. That’s because this time, the government is the bank. Ah well, what’s another trillion dollars in debt? We’re already at $16 trillion.
This insanity won’t continue forever. It will blow up like the mortgage loan debacle did. Let’s pray the fallout doesn’t destroy higher education the way the housing bubble decimated the housing market.
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Article comments
at 10:43 a.m.
Dorothy: Sorry, but this is factually incorrect... the govt gave $$ to the banks to loan to students... Banks kept the interest, fees, charges and CONGRESS guaranteed the WHOLE balance, not just the original principal, so the BANKS lose NOTHING and gain LOTS... The student loan 'bubble' is an inaccurate descriptor BECAUSE banks lobbied Congress to remove ALL consumer protections = truth in lending, laws against usury, refinancing, lowering interest rates, statutes of limitations, and bankruptcy were REMOVED from student loans, likening them to murder and treason... wth!! There is literally no way to de-escalate or de-leverage these vastly inflated predatory interest bombs unless consumer protections are restored. In addition, it will continue to expand because the LENDERS by law do NOT have to apply any portion of the borrowers' payments to the principal, and coumpounding interest can and is capitalized to the principal at regular intervals... The PROBLEM is the repayment structure and all the loopholes that Congress has written in for lenders while RETROACTIVELY changing terms of contracts on millions of borrowers who have NO recourse. There are currently 36 million loans out, with 66% NOT in active repayment, according to the New York Fed and Moody's. IF -big IF - Congress had TRULY wanted to help educate the middle class, they would have directly loaned at 3-5% simple interest, with inflation adjusted limits, etc and NOT handed the keys to the Treasury to the BANKS.
at 3:19 p.m.
Dorothy: P.S. The rise in tuition correlates, NOT with the increase in student borrowing, but with the DECREASED support for state higher education due to increased funding cuts TO education by the Feds.
at 4:56 a.m.
Brandon: Hey, here's an idea: WHY DON'T WE JUST FULLY SUBSIDIZE (or almost-fully) TUITION LIKE THEY DO IN PLACES LIKE EUROPE, for christ sake?? Why do we even REQUIRE students to pay for higher ed. upfront?? It's absurd! Young adults should have to go into a MOUNTAIN of debt just to get more training and education FOR A HIGHER-PAYING AND MORE-FULFILLING CAREER than they'd otherwise obtain? Esp. IN THIS ECON.?? Education is a RIGHT, not a privilege. In this global economy, when high skill levels are GREATLY NEEDED, why does it make sense to shut anyone out just b/c they "can't afford to pay"?? WHERE ARE OUR PRIORITIES? Higher education just becomes more and more of a NECESSITY as the future progresses in the industrialized world. Ergo, it ONLY MAKES SENSE to make tuition as affordable as possible for students, esp. higher ed. The OTHER university systems in the West seem to be doing JUST FINE (i.e. no "tuition bubble", whatever THAT is...). Plus, I really don't think people who use phrases like "student loan bubble" ACTUALLY understand the real meaning of "bubble" in an economic context. Since when is a bunch of people having to take out massive loans FOR SOMETHING SUPER-EXPENSIVE "a bubble"? Does that mean there's a "car credit bubble", too? A) the amount of students (or percentage of population, anyway) going to college probably hasn't changed all that much, ESP. in an upward direction, in the last decade or 2. B) Unlike the housing market, prices are NOT going up because "Independent sources are valuing these entities even more." College tuition is much more complex and has to do with things like less state PUBLIC aid and/or less donations from private individuals and orgs. And C) There's no "third party tuition market" where LOTS OF PEOPLE ARE SELLING THEIR 'RIGHTS' TO GO TO THIS OR THAT UNIVERSITY THEY GOT IN FOR HIGH PRICES TO SOMEONE ELSE. Besides, IF your theory were true, are you implying that IF ONLY WE GOT RID OF ALL STUDENT LOANS, college prices would MAGICALLY FALL DRAMATICALLY in the next year or 2?? Get real... Things NEVER work that simply in the REAL WORLD. The one thing that I DO envy about conservatives is their uncanny ability to oversimplify everything, esp. economics, rather than being able to see the actual NUANCES AND COMPLEXITIES. As something of an intellectual, I can't just oversimplify things like that and stay satisfied. It's not in my "DNA."
at 5:04 a.m.
Brandon: You know what's funny, though? In ALL THE YEARS that student loans have existed in the U.S. in any meaningful form or extent (at least since the 1940s), NOT A SINGLE ADMINISTRATOR OR HIGHER-UP AT ANY UNIVERSITY has 'blown the whistle' about this "connection" you claim exists between GOV'T GIVING LOTS OF MONEY IN STUDENT LOANS AND HIGH TUITION. NOT ONE INSIDER! Hell, I know of at least one recent book about the REAL reasons why tuition is so high WRITTEN BY A CORNELL ADMINISTRATOR HIMSELF, and he does NOT by any means imply this "causal" connection you refer to, A.J. Or are you gonna tell me he's "oblivious" or "lying"? I mean, if student loans were 'necessary' even in the 1960s, that MUST mean that quite a few people COULDN'T AFFORD COLLEGE EVEN BACK THEN WHEN PRICES WERE MUCH LOWER, right?? Which kind of DEBUNKS this silly notion that "student loans lead to higher tuition because administrators jack up the prices since they think that the gov't NEVER investigates their 'price-fixing' and calls them out, so the gov't will give whatever college administration SAYS it needs." Seriously, don't you think THAT BY 2012, the feds. would've BEEN ONTO THE BIG, EXPENSIVE UNIVERSITIES by now and REALIZED something was amiss if they REALLY were artificially jacking up prices just b/c government was giving out student loans "willy nilly"? But you, some random college student (not to bash Mizzou or anything, mind you), claim to HAVE FIGURED IT ALL OUT BY LOOKING AT A FEW STATISTICS AND MAKING A FEW "SCHOLARLY" DEDUCTIONS.