There has been a lot of talk about bubbles in the past decade or so, as a result of the financial crash caused principally by massive defaulting on property loans in the United States around the end of the last decade. The term ‘bubble’ here turns out to be surprisingly apt. A bubble is essentially a very fragile layer of soapy film, tends to be short-lived, and generally pops in one of two ways: it can be inflated until its very size causes it to collapse, or it can be destroyed by some external force. All of these are applicable to financial bubbles and even the most recent market crash itself. External pressure in the form of stagnant wages and rising interest rates popped the bubble open, and the size of the banks backing the loans (prompting the term “too big to fail”) meant that they simply had to be rescued by the government, or else there would be a global banking catastrophe as a result.
This has caused the current generation to mistrust loans and large investments, oftentimes taking a step back from commitments. Despite the rise of novated leases, the invention of the Novated Lease Calculator and various incentives for first time homeowners, the Millennial generation are looking to tiny homes which are much more affordable and financially sustainable or even mobile housing, instead of the conventional brick and mortar, landed property.
Thankfully, the housing crisis is in the past, and we’ve all learned our lessons. Or have we? There has been no shortage of yelling from the rooftops recently about what is now being called the ‘student loan bubble’ and the imminent danger it poses to our economy if it pops (as bubbles do). The numbers, at a glance, are frankly alarming. National student loan debt currently sits in the trillions of dollars and continues to rise, and the number of borrowers defaulting on their loan repayments sits near 20%. Some writers go into what appears to be full blown apoplexy in the face of what they see as a ‘blockbuster-level perfect storm,’ destroying not just the entire university system but all of the communities and smaller-scale economies (and jobs) that support and rely on campus and student activity in the maelstrom. Even more even-keeled observers are not necessarily optimistic about what a student loan bubble might look like as it bursts.
On the other hand, there are those who see the idea of a bursting student loan bubble as alarmism. This argument follows the logic that student loans are significantly different from mortgages in a number of ways, despite both being (potentially) federally-guaranteed loans. These people make arguments hinging on what may seem like a technicality to casual observers but could end up being highly significant in the long run. The linguistic crux of the issue is the ‘burst’ itself, a swift, unrelenting crash of market rates because of an equally rapid and widespread move of loans into default, resulting in sold and foreclosed homes, cratering property values, and so on.
The student loan bubble can’t burst, per se, for a number of reasons. Most importantly, you can’t sell your college education. When the housing market crashed people sold their homes and took what money they could, at a loss. A college degree isn’t an appreciating asset but rather an investment against future income. That’s the second difference between diplomas and houses: student loans are notoriously difficult to get rid of. It’s not impossible, but they don’t simply vanish during bankruptcy like other types of debt, and that, coupled with the worryingly high rates of student loan defaults, is one of the reasons why student debt forgiveness is a hot political topic at the moment. As it turns out, when borrowers attempt to discharge their student loans through bankruptcy, the rates of success are surprisingly high, but an incredibly small number ever make the attempt in the first place.
This means that rather than defaulting, going bankrupt, and moving on with a weakened credit score, there will instead be millions of college graduates having their wages and earnings garnished by the government in order to pay back decades-old loans, resulting in a vanishing middle class and a shrinking economy. If that doesn’t make you suddenly feel better, you’re not alone, but it could potentially still be preferable to a sudden financial market crash, if one really had to choose.
There are some solutions in the pipeline. One of the main issues, unfortunately, is the middle-class fetishization of the college degree in the first place. Statistically, post-secondary wages are better, but there are plenty of important jobs with good wages and benefits that are bereft of workers who went to art school instead because their parents expected it of them.
Student loan forgiveness is possible, but at a cost to the taxpayer. Many have also made convincing arguments that skyrocketing tuition rates are a result of easy loan money from the government and need to be reined in along with multi-million dollar sports complexes and unreasonable administrative salaries, which are all good ideas, but certainly won’t do anything to help the millions of graduates already working to pay back their high-interest loans. We’re in the bubble with them, after all.