How To Build A Student Debt Bubble In 3 Easy Steps


The world is just now getting back on its feet after the global financial crisis that was caused by the Housing Bubble of the 2000s. The last thing we need is another major bubble (“what’s a bubble?“), especially one that can’t be resolved in some of the ways the Housing Bubble was. Despite this, we are building an even bigger and more-problematic bubble in higher education just like the one we build in the housing market. There’s good news, and bad news. First, though, how we got here.

A bubble occurs whenever there is a rapid expansion in a market, usually driven by perceived higher-value in the market. It is then followed by a contraction in the market, during which the perceived good investment in the product that caused the expansion is shown to have been a poor investment.

Step 1: The Bubble Expands

Even if the buyer can’t afford the product, if they believe it will increase in value over time (i.e., common-thought before the Housing Bubble was that houses will almost always increase in value; common-thought is that having a college degree will almost always land you a better job than if you didn’t have it), then they believe they can earn back what they spent and make a profit.

Just like house-flippers (those who buy a house and sell it for a higher value), people who invest in higher education by spending money on a degree believe that the money and time they spend on the degree will be less than that which they will earn as a result of having the degree and that this final profit from having the degree would be more than not having the degree.

This kind of investment can be encouraged if credit is easier to come by. In the housing market, this would be shown by easy-mortgages that banks were issuing to people. In higher-ed, this is now shown by federal student loan programs, private loan programs schools establish with banks and creditors, and third-party student loans from creditors. Student loans are incredibly easy to come by, so students are encouraged to take them on to get their degree, which they think will land them a great job and will make the loans easy to pay back.

Step 2: The Bubble Stands Still

After people have bought up the product and attempt to sell it (e.g., the house you bought and want to sell at a profit; you with your college degree), they find the market has adjusted and the value of what they invested in is no longer increasing. The bubble has come to a standstill. The value of the product is no longer perceived to be increasing.

Step 3: The Bubble Pops

There comes a time when the debt taken on to pay for the product has to be paid back. Before the bubble came to a standstill, this would have been easy. The house you purchased could be flipped and sold for a profit. Your 4 years in college could land you a job with a nice salary. Both of these could be possible because these goods — your house and your degree — are perceived to be valuable. Once this perceived value is gone, though — after the market has adjusted and there is much less demand for it — there is no easy way to pay off this debt.

In higher education, this becomes clearer when a college degree — what was once thought to be a ticket to the American Dream — can barely get students a job that pays to put a roof over their heads and food in their mouths, let alone pay off their debt. If everybody has a college degree, the perceived value of it among employers is lower, especially considering that these degrees don’t prepare students for the jobs for which they are applying. If there are 40 jobs open which require degrees, but 400 people apply, and all have degrees, your degree is no longer that ticket to landing the job.

There’s good news and bad news at this point. The bad news is that with mortgages, when you declare bankruptcy, the debt can go away. It’s a less-than-ideal solution, but at least there’s a final way out. With student loans, when you declare bankruptcy, they stay.