Rebuttal to the Student Loan Bubble: Tell Me Why I'm Wrong

America never met a bubble it didn't like, and education seems to be our next buy-at-any-price obsession. Student loan debt now totals more than $1 trillion. For many students, it will take back-breaking effort to pay this debt back. And they have little choice: Most student debt can't be eliminated in bankruptcy.

But like any emotion-laced issue, the student-debt story can be prone to hyperbole. My biggest peeve is that most stories covering the issue profile a student with $100,000, or even $200,000, of debt. Read enough of these stories, and you'll think graduating with six figures of debt is the norm. But it's not -- by far. While journalists can find students drowning in six-figure debt, they are a small minority. As the Federal Reserve writes, as of 15 months ago (emphasis mine):

The average outstanding student loan balance per borrower is $23,300 ... The median balance of $12,800 is roughly half the average level, which indicates that a small fraction of people have balances significantly higher than the median. About one-quarter of borrowers owe more than $28,000; about 10 percent of borrowers owe more than $54,000. The proportion of borrowers who owe more than $100,000 is 3.1 percent, and 0.45 percent of borrowers, or 167,000 people, owe more than $200,000.

Hmm. Almost 75% of those with student loans owe less than $28,000. Ninety-seven percent owe less than $100,000. The median student loan balance -- the middle level where half owe more and half owe less -- is $12,800.

I don't wish to trivialize $12,800 of debt, or even the mean average of $23,300. If you're unemployed or in low-income work, it can be a big burden.

But let's put it into context. The average auto loan amount in 2012 was $19,492, according to credit rating agency Equifax. For a new car, the average loan amount is $25,714. 

Why, then, is there so much uproar about the student debt crisis when the average new-car loan is greater than the average student loan? No one ever talks about the "Nissan Altima loan crisis." Plus, the benefits of an education will last a lifetime, and on average demonstrably increase your employment and earnings potential. A car loses value as soon as you drive off the lot.

A few people I've posed the question to have offered reasoned rebuttals. They note that you have to have a car to get to work. True. But a degree dramatically increases your odds of having a job to drive to -- the unemployment rate for those with a bachelor's degree is almost two-thirds lower than it is for those with only a high school diploma.

They also note that an auto loan is collateralized by the vehicle. If you can't afford the loan, you can sell the car to help repay the balance. True again. But a car requires expensive upkeep and repairs as it ages. The benefits of a degree compound over time as career opportunities open new doors to promotion, and higher wages. A college graduate will, on average, earn far more in their 40s and 50s than they did in their 30s, while those without a degree see much more stagnant (and lower) wages throughout their lifetime. The "collateral" of a student loan can't be sold, but it tends to appreciate over time.

I think what the student loan crisis comes down to are issues between anecdotes and averages. As long as there are anecdotes of people graduating with six-figure debt and flipping burgers, journalists will write about them with so much passion that you'd think they're the new normal. But they're not. The average college grad is more employable and earns far more than those without degrees, and the average student loan is less than the average new-car loan -- a debt few seem bothered by. 

But I won't pretend to understand all sides of this debate. I can just look at the numbers and tell you what I see. Where am I wrong? What am I missing? You tell me in the comment section below.


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  • Report this Comment On February 26, 2013, at 5:49 PM, vegaland wrote:

    Most of those high dollar student loans are going to medical and dental students who are going to make tons of money a few years after they graduate and will easily be able to afford those loans.

  • Report this Comment On February 26, 2013, at 5:53 PM, TMFMorgan wrote:

    ^ Evan Soltas of Bloomberg made a similar point the other day: "Another thing we find with student-debt horror stories is that the interviewees are always liberal arts students. Nary an engineer."

  • Report this Comment On February 26, 2013, at 5:59 PM, xNorthSiderx wrote:

    All of what you're saying might be true, but if it is, then it should logically follow that private lenders would invite the risk of taking on the currently outstanding student debt.

    I am fairly skeptical that private lenders would underwrite loans to a great number of students who receive government subsidized student debt. If that suspicion is true, then there is clearly more to this story.

  • Report this Comment On February 26, 2013, at 6:04 PM, TMFMorgan wrote:

    ^ There are roughly $150 billion of private student loans outstanding, so private lenders are in the game. Their share would undoubtedly be higher if they weren't undercut by federal loans with lower interest rates.

  • Report this Comment On February 26, 2013, at 6:56 PM, friscobeats wrote:

    I think there's one more level of analysis that needs to take place here.

    Not all degrees are equal, though 4 years of education at a given institution cost the same amount no matter the course selection.

    that is to say; $100,000 may be a very serviceable debt for a budding neurosurgeon, while $12,000 of debt may be a huge burden for a struggling novelist.

    Especially troubling is the effect of underemployment in some fields. If your college degree affords you nothing better than what a high school graduate can get (because your chosen field of study is not marketable), then you will be a greater drag on the economy, both because you'll be servicing debt rather than consuming new products and services, and also because of the opportunity cost of spending time and money on a worthless degree.

  • Report this Comment On February 26, 2013, at 11:45 PM, Veregund wrote:

    Student loans are approaching a trillion dollars, already surpassing total credit card debt and auto debt. This is no insignificant burden.

  • Report this Comment On February 27, 2013, at 8:04 AM, esbita wrote:

    If I can't afford (or don't want to pay for) a new or nearly-new car, I can go to the used car lot and get a middle-aged Ford sedan for a lot less.

    The analogy doesn't work so well for the education industry. If you want to be a mechanical engineer or a CPA, you can't say "I spent two years at a community college so I'm part way toward the credential." Employers aren't likely to hire you for any work related to the degree, even if they paid you less. You'll have an edge over the high school grads for that receptionist opening, though.

    Sure you can go to a state university and contain the costs somewhat- but even state university grads are graduating with significant debt now.

    However, if you have what it takes to graduate with one of the "harder" majors, you probably have at least some sort of merit scholarship softening the blow. But that's hardly a given at state universities.

  • Report this Comment On February 27, 2013, at 8:17 AM, XXF wrote:

    Here's the more common story that doesn't get the press it should: I graduated with an undergraduate and masters degree in an in demand field in 4.5 years. During those years I took 6 months off of school to intern with a respected company in my field. I worked hard and they offered me a job once I graduated.

    After another year of schools I had my degrees, 33k in debt and a job. I moved to a city where I didn't know hardly anyone, rent an apartment by myself, pay a car loan and every other bill that comes due and now, 14 months removed from college my student loan debt is down to 13k. It will be paid off before the end of the year (the goal is actually by the end of August).

    The idea that we blame schools and lenders for people who graduate with no hope of a future is absurd. I know those people, and let me tell you no matter how many of their sob stories find their way to CNN's frontpage there is no student loan crisis, there is a young-adult responsibility crisis.

  • Report this Comment On February 27, 2013, at 9:07 AM, obga18 wrote:

    because when you're a teacher and already have a mortgage that you pay on time for, and a car payment. that extra 450$ sucks the life out of whats left of your "paycheck".

    never mind the 200$ that was just taken out for the payroll tax.

    but dont worry the markets are at all time highs because everything is great? right? right???

  • Report this Comment On February 27, 2013, at 9:13 AM, conradlorie wrote:

    I agree to the comment xxf wrote it is a students responsibility. Let me tell you one thing we as Americans are going to end up with a crisis of not having good educated people because of high college costs. Many people will not choose college to further their education because of the debt, or they will choose to quickly use their intelligences just enough to get by. Graduating with no true meaning of their degree. Creating educated FOOLS!

  • Report this Comment On February 27, 2013, at 9:17 AM, fredvr223 wrote:

    The "crisis", in my humble opinion, is not that the majority of these students cannot pay back their loans, but that many of them use money every month (my payment is upwards of $350 for $45000 in student loan debt) that could otherwise be saved, invested, or spent. I am not complaining and perhaps pointing out the obvious, but this money every single month for the next 10-20 years will never be used to stimulate the economy. Multiply whatever the average student loan payment is by the amount of people paying it and it costs our economy plenty.

  • Report this Comment On February 27, 2013, at 9:47 AM, slpmn wrote:

    It seems to me you're arguing in favor of the basic logic behind why it makes sense to lend to students. That's not the issue when it comes to bubble discussion. Lending bubbles form not because the there's a fundamental problem with the type of lending, but rather because the amount of lending greatly increases and the money goes to people who shouldn't be getting it. The obvious comparison is with the mortgage lending bubble. There's nothing wrong with the practice of making loans collateralized by the home they are used to purchase. The problem is when there is an explosion of that lending and the money goes to people who shouldn't be buying the homes.

    I don't know a lot about the student lending market, but I do know banks and finance companies are looking anywhere they can for a growth lending sector. That means there is potential for the problems you always get when too much money is chasing a limited number of quality borrowers. And, to the extent the loans are being securitized, you've got the classic problem of the disconnect between borrower, underwriter, and end point investor (like in the mortgage bubble). The lender doesn't care who the money goes to because they're going to sell the loan for a fee, and the investor doesn't have any idea what he's buying, he's just looking for a good yield in a terrible interest rate environment.

    So, there may or may not be a student loan bubble forming, but it seems the pieces may be in place for one.

  • Report this Comment On February 27, 2013, at 9:57 AM, TMFMorgan wrote:

    Some good comments. Thanks, everyone.

  • Report this Comment On February 27, 2013, at 10:07 AM, astuber9 wrote:

    ^

    Money spent on education is part of the economy.

  • Report this Comment On February 27, 2013, at 11:59 AM, DS31 wrote:

    Fred,

    You're only seeing this "crisis" from one perspective. The principal and interest that you pay to the lender is providing a job to some processor and a profit to some investor. Both of those people are spending that money in the economy today, so don't worry so much about what you're refering to when you say "it costs our economy plenty."

  • Report this Comment On February 27, 2013, at 12:19 PM, gmgily wrote:

    I think that an important part of this conversation that is often overlooked is that the "bubble" only exists because parents used to fund their children's educations through their home equity loans. These days there is no equity so a different loan vehicle is being used. I would imagine that as many parents are helping their children repay their student loans, just as they were helping to pay through their home equity loans.

  • Report this Comment On February 27, 2013, at 1:19 PM, TMFMorgan wrote:

    <<I think that an important part of this conversation that is often overlooked is that the "bubble" only exists because parents used to fund their children's educations through their home equity loans. These days there is no equity so a different loan vehicle is being used.>>

    To be fair, I think it's overlooked because it's objectively untrue. The average annual growth rate of student loans was actually *higher* during the housing bubble than it is today.

  • Report this Comment On February 27, 2013, at 2:11 PM, electedface wrote:

    Student debt is stunting the growth of the economy. Student loans have increased by 500% over past decade. As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.

    http://www.youtube.com/watch?v=mRA9ndc1pCM

  • Report this Comment On February 27, 2013, at 2:16 PM, TMFMorgan wrote:

    ^ See, this is what I tried to get at in the article "Stunting growth," "insurmountable," "plagued." What does any of that mean? Why is an average balance of $12k an insurmountable threat but a $20k car loan is just a normal part of life?

    Most of the debate seems to be driven by buzz words and hyperbole, but I think the numbers are far less threatening.

  • Report this Comment On February 27, 2013, at 2:53 PM, sheldonross wrote:

    Education is an investment, those who make good choices, investing in an engineering, medical, accounting, science, etc. degree made good investments. They likely will have no trouble servicing their debts.

    Those who invested 100,000 dollars in a literary degree (friscobeats) probably made a poor choice.

    As other have mentioned, it's a systemic problem with personal responsibility in this country.

    Who's responsible for poor investments? The investor. Why should the rest of us have to shoulder the burden of other people making poor decisions.

  • Report this Comment On February 27, 2013, at 3:00 PM, slpmn wrote:

    ^ Part of the problem is there is a large faction of the public who don't really understand the role debt plays in an economy. To grossly oversimplify their thought process (which is, in itself, grossly oversimplified), the extent of their thinking is "Family credit card debt, bad. All other debt, bad, too." So they hate debt.

    Second, and specific to student loan debt, I think you've got people for whom the debt is not really the issue, the rising cost of college is what they care about. i.e. they are on the hook for their kids' college, not a bank. I know from first hand experience that some of those people blame the "easy" availability of student loans, and the government's role in that market, for contributing to the rapid growth in tuition costs. They think tuition wouldn't be increasing so much if it wasn't so easy to get the money to pay for it. I think there might be a grain of truth to that. But, I think it's one of those necessary evils. Poor kids gotta be able to go to college, too!

  • Report this Comment On February 28, 2013, at 11:05 PM, SGLear wrote:

    Reading the comments for this article, it's readily apparent to me that many of you still buy into the lie that "higher education is a great investment", that "it's good debt" and that "it'll open doors and give you LOADS of greater earnings potential and job opportunities" when the truth is completely opposite.

    I went to college in 2005, straight out of High School into the highly in-demand field of Computer Graphics and Visual Effects. Before attending, I paid a fee to cap the tuition at $60K for all 4 years, but after graduating in 2009, finding no work because I was either not experienced enough or over-qualified, that "investment" ballooned into a figure that is now $139K. Furthermore, my school provided absolutely no education when it came to student loan finance and put a plate of private loans on the table in front of me, so to speak.

    What people in the Federal Reserve (and frankly, why you would trust the Federal Reserve is beyond comprehension) don't understand, or won't tell you, is that it doesn't matter what fields you studied or how much debt you have, because it's all for naught anyways. You have: state and private institutions participating in fraudulent practices, such as misleading or downright false graduation employment claims, schools and counselors propagating the antiquated and now relatively false claim of "degrees get you better jobs" and a job market where no employer, big or small, wants to hire graduates with Bachelors or Master's degrees, because they're too "risky" and might cost too much to train or cost too much because they have a Masters.

    And one more thing, comparing Student Loan debt to Auto or Home debt is really comparing apples to oranges. Much of the consumer protections you have on other loans are non-existent with student debt, such as the ability to discharge in bankruptcy. That means that, even if you have a relatively low $12K student loan debt, if you lose everything, and can't pay your bills, you won't be able to file bankruptcy and pick yourself back up; that student debt will shackle you to poverty and there's nothing you can do about it.

    So don't come on here, preaching on your soapbox about how the Millennial generation are nothing but young kids who don't take responsibility for their student finances, because not only is that disrespectful and patronizing, it also shows a marked lack of maturity in yourselves. This isn't the Higher Education of the past, folks, where you paid for school by working at Dairy Queen for the summer. The sad reality is that the exorbitant cost of Higher Education has so outpaced inflation in recent years that the usury lenders and institutions are committing constitutes nothing short of daylight robbery.

    Many of us students have forfeited our lives (possible marriages, homes, children, goals) because we did as we were told: go to college and get a good education. We're not irresponsible, we're indentured servants. Believe me: no one's crying foul about $12-25K in student loan debt, because those averages are some of the worst and most deceptive numbers thrown out their today to disparage and cover up the real issue. Most of those statistics aren't factoring in many of the private loans and only really look at federal loans, which have repayment options like Income Based Repayment and deferrals: no such options are available with Private Loans, which allows a small debt to balloon into an insurmountable, crushing mountain of debt.

    People, stop treating Student debt like it's no different than any other debt, because it's an altogether DIFFERENT sort of beast. And to the commenter above who mentioned engineers: yes, they're also suffering. I know this, because I have engineer friends, including software engineers.

    There is a very real student loan crisis in America, and abroad, and it's not something to trivialize with snippy retorts about "those lazy whipper-snappers of today." The lenders, banks and higher education institutions are very much to blame for what's going on in the higher education finance industry and need to be held accountable for their predatory practices.

    Trust me, there's no quantifiable ROI for education like there is with securities, because if there was, we'd be able to do a number of things, such as: look at 5, 10, 20 year histories of certain degrees and job placements, gain monetary interest on our educations when the field becomes more bullish, take a loss on our taxes when our degrees decrease in value (not to be equated with the tax credit offered for student loan interest paid), or other such incentives.

    Student debt is something that, for most people, never goes away. Some, including a commenter on this article, may have been able to pay off their loans in a timely, or quicker manner, but not everyone is so fortunate as to be guaranteed jobs right after college, nor be offered such lucrative internships, especially today when no companies want to give students a chance, fishing instead for industry veterans with a work history that no student can compete with.

    That's all I have to say on the matter, for the ignorance of most people to the real suffering and effects of student loan debt can't be effectively remedied through this post alone. I'll instead refer you to http://www.studentloanjustice.org where you can receive a proper "education" on the matter.

  • Report this Comment On March 01, 2013, at 3:34 PM, sheldonross wrote:

    ^Apparently your college sucked. Did they point out the difference between statistical and anecdotal evidence?

    And anecdotal evidence helps if it's real. Reading through your post brings me to the conclusion that it's contrived propaganda. And... then there's the plug at the end. Got it.

    Go do something useful with your life, like join PETA! They're right up your alley.

  • Report this Comment On March 01, 2013, at 3:54 PM, whereaminow wrote:

    Well if you don't know how an asset bubble is created, good luck trying to spot one.

    That being said, this is not your typical asset bubble, since it's more of a service good. But like all bubbles, they pop when the money runs out. Is the money going to run out of higher education any time soon? Unlikely. Even though politicians like to threaten the end of the world if we ask for one penny of spending cuts, and even though they always threaten (wisely) to cut all the stuff voters like (rather than all the waste and corruption they don't, which any rational person would want cut first), the bottom line is Education is a Religion held too dear.

    If the people ever wake up, and realize that the return on investment is diminishing and will continue to do so, then we may see them balk. When that happens, yeah this service bubble goes belly up.

    But that's not happening anytime soon.

    David in Liberty

  • Report this Comment On March 01, 2013, at 9:14 PM, TMFGemHunter wrote:

    I don't think the uproar is about students with $10K or $20K of student loan debt. People always pull the $100K and up cases because those are the ones that actually constitute the problem. Perhaps the media is blowing the problem out of proportion when it refers to the number of people with student loan debt as opposed to the much smaller (but still large) number of people with "excessive" student loan debt.

    I think as a society we need to change our thinking about the value of higher education. College costs can be a good investment for people pursuing a defined career path that is in relatively high demand. However, that assumes either public college costs or private college costs with need based or merit aid. Taking out $250K of debt for a college degree does not make sense for many people (it could be justified for a medical degree, though). Going into significant debt to get a liberal arts degree, however, is becoming a more questionable decision.

    In some cases it may be fair to blame (former) students for not taking responsibility. That said, if you went into a college career office in 2006 or 2007 to ask about whether it was "OK" to major in English literature or anthropology, you would have been told that it doesn't matter what you study: you're learning how to think. People who chose majors at that time and graduated in 2009 don't have very good employment records. At some abstract level, I suppose you could argue that they are still responsible for their decisions: no one put a gun to their heads. But expecting a 19 or 20 year old to realize that everything they are told by their parents, teachers, and guidance counselors could be invalidated by the biggest economic downturn in 70 years is not realistic.

    For people entering college since the recession, the ignorance excuse is less acceptable. By now, even high school kids should realize that signing on the dotted line for tens of thousands of dollars in student loan debt is not a decision to be made lightly.

    Adam

  • Report this Comment On March 03, 2013, at 1:39 PM, DividendsBoom wrote:

    I paid 100% of my college costs and living expenses by working full-time while going to school, and working even more in the summer. I took every subsidized loan I could and invested the float in long-term bank CD's earning between 5-8%. In October of 2008 I pulled all of the money out of bank CD's and started buying the market (including long-term calls) and continued through April 2009. That worked well.

  • Report this Comment On March 05, 2013, at 10:01 AM, Reldousoky wrote:

    Graduated with 30K in loans and paid them off in 3 years thanks to the graduate degree I received. Even so, I had to budget every month to make that happen.

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