The student loan bubble is the result of government policy.
Just as the government sought to engineer people into houses, it now seeks to engineer them into higher education. Congress established Sallie Mae in 1972 to encourage banks to loan more money for college. The Affordable Care Act of 2010 allowed the government to loan money directly to students. The following year the Taxpayer Relief Act extended tax breaks to student loan borrowers. Predictably, the Federal Reserve kept interest rates at historically low levels, making college loans cheaper.
And the price of a college education soared--just as one would expect from a market flooded with cheap money. By law, lenders cannot even deny Stafford and Perkins loans (types of federal student loans) based on the borrower's credit or employment status. What other reason is there to deny a loan? And just as home buyers took out loans to speculate on houses they could never hope to afford, students are taking out loans to cover educations they often cannot complete and which often do not hold value in the market even when completed. Government meddling has again separated profit from risk. Universities get to keep the tuition profits while taxpayers are forced to shoulder the risk of students not paying back their loans. ...
From 1976 to 2010, the prices of all commodities rose 280 percent. The price of homes rose 400 percent. Private education? A whopping 1,000 percent.
When the student loan bubble pops it will be worse than the end of the housing bubble.
In the end, this bubble will be worse than the last. Even when homeowners got hopelessly behind on their mortgages, two options helped. First, they could declare bankruptcy and free themselves of their crippling debt; second, they could sell their houses to pay down most of their loans.
Students don't have either of these options. It's illegal to absolve student loan debt through bankruptcy, and you can't sell back an education.
The result is predictable: anything that can't go on forever, won't. The cost of education will drop. Congress will make student loans will be made dischargable. Many colleges and universities will go out of business.
Fortunately for the country, unlike the end of housing bubble, middle-class Americans won't be the ones who see their wealth evaporate. Many college degrees are already worthless, no matter what the balance is of the debt incurred to pay for the education.