student loan crisis bubble

Is the Student Loan Crisis Solving Itself?

Michael Lux Blog, News, Student Loans 0 Comments

A new report suggests that rather than bursting, the student loan bubble is being released with a slow his.  The theory is that unlike the mortgage crisis, where there was a sudden burst, the student loan market is slowly correcting itself.

The article, published by the Atlantic, cites three main reasons for the theory:

  1. Less Teenagers in the United States – Even though the percentage of people attending college after high school has stayed level, the number of people in high school has dropped due to declining birth rates.  Fewer people in the college age bracket means fewer college students.
  2. Colleges are closing – Between social pressure and increased competition, price increases have become harder for schools to justify.
  3. For-Profit schools are imploding – Few students are attending for-profit schools.  A better job market has reduced the for-profit target audience and government crackdowns on shady practices have been devastating to the for-profit college model.

The Sherpa Viewpoint

A reduction in for-profit school enrollment is definitely a step forward.  As the Atlantic called it, an “implosion”, is a win for consumers.  Coupled with price increases becoming smaller and harder to justify, there are certainly signs of hope in the post-secondary education marketplace.

However, we think it is a stretch to say that the student loan crisis is being solved just because there are fewer college age Americans.  Additionally, just because the growth of the bubble has slowed, it does not mean that the bubble is getting smaller.

Two major issues still exist that contribute to the ongoing student loan crisis:

  1. Student loans and the mortgage fallout – Anyone with student loans knows the impact they can have on buying a house.  Economists are starting to notice the trend as well.  Because fewer recent graduates can buy a house, prices necessarily fall.  This is one aspect of the student loan crisis that affects everyone — not just those with student loans.  The observations by the Atlantic, though positive, do little to help the housing market.  In fact, fewer college-age students mean fewer first time homebuyers.
  2. Unpayable debt for many borrowers – Despite the improvements in some areas, people already struggling with student loans remain in trouble.  Less people joining their ranks each year is definitely a good thing, but less people going to college doesn’t solve any of their issues.  Whether or not student loans bring the entire economy down like the housing market did ten years ago shouldn’t change our desire to help those that have been left behind.  The absence of basic consumer protections, such as bankruptcy, means lenders still hold all the cards and borrowers in over their heads have little hope.

Bottom Line

It would be great to get the student loan crisis under control.  The trends observed are certainly positive steps forward, but rumors of the demise of the student loan crisis have been greatly exaggerated.