Are student loans the next financial bubble?

My regular Big Ideas column for the Globe and Mail Report on Business Magazine is this month about a looming potential problem that everybody seems to know about already. It was interesting to learn, researching this piece, just how widely the problem is already being discussed while nothing is really happening at higher levels to forestall a disaster. You have to wonder whether President Obama calling for every American to pursue a year or more of college education is, in fact, ramping up demand for an asset class that is not providing a return on the investment people are making. If that analysis is valid, then Americans could be in a very similar position in education to where they were in real estate circa 2007.
Seems like everyone can agree what the next big economic bubble will be. For those who haven’t seen the alarming study released by Moody’s Analytics last month, that would be student loans. There are 1 trillion dollars now outstanding in American student loans and Canadians aren’t in much better shape with a total of 22 billion and counting outstanding in August.
At first glance, the situation looks a lot like the run-up to the mortgage meltdown of late 2008. Both home mortgages and higher education have long been touted by governments as solid, even virtuous investments. The consumer response to this encouragement, meanwhile, has been greatly facilitated by the wizardry of high finance, in the form of mortgage backed securities on the one hand and Student Loan Asset Backed Securities (or SLABS) on the other. And in a final, eerie parallel, consider that legendary short seller Steven Eismann has been shorting the education sector for two years, re-enacting his suspicion of mortgages from just a few years prior.
Looked at more closely however, an irony emerges. The mortgage crisis had the decency to punish all involved: financial institutions, governments, and borrowers. The student debt crisis, in contrast, seems poised to disproportionately punish those who have the most to lose, students. And that will have untold longer term consequences.
To put this in context, realize that tuition increases have massively outstripped inflation in the past few decades, up 400% in the US over 30 years and 200% over 20 years in Canada. Clearly, graduating in the weak job markets of 2011 and 2012 is going to be challenging for students carrying $50,000 in debt. But for those who can’t find a job, the situation will be much worse given they cannot escape the obligation. Student loans in the US aren’t aren’t even dischargable by bankruptcy. And in a situation only marginally better in Canada, unemployed young grads will have to survive seven years out of school before filing is an option and even then the federal government can object and require them to pay.
A house you could always walk away from. That “investment” in education will become an albatross around the neck of a generation and they’ll have no way of leaving it behind.
Will anyone emerge smelling like roses if the student debt bubble bursts? Ironically, it may be the educational institutions who, at least in the US, have facilitated student debt so lavishly through SLABS and who have at the same time benefited so handsomely from the aura of cultural virtue that has grown around education generally. Universities will probably do just fine as a host of recent news reports (see: here and here and here and here) cite the boom in Chinese and other international students flocking to American and Canadian universities in ever greater numbers.
The troubling implication, however, is that this bubble may have a particularly bitter aftermath as a generation of students is disillusioned in North America, at untold long term cost to domestic confidence in education, while universities simply turn to educating the emerging generations of other countries.
Posted: Monday, Oct. 3, 2011 8:26am