The Education Bubble

Posted on May 19, 2011

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The Economist.com gets this one wrong.

The education bubble isn’t about a student “selling” their degree in the open market.  Here’s why there’s an education bubble:

  • Student loans are securitized and resold in the same way as residential mortgages.  And the numbers are staggering. Know that whole Fannie Mae/Freddie Mac thing going on right now in the housing market?  Introducing Sallie Mae.
  • The demand for these securities is driving more private sector lenders to get in the game.  CNBC did a piece on this back in December.
  • While students aren’t selling their degrees, the value of these degrees to the market is clearly diminishing.  Students with degrees are increasingly unemployed.  This isn’t the same structural unemployment where an auto worker in Detroit doesn’t qualify for a health care job, but a student that’s just graduated from college should have the most relevant skills in the market, yet they can’t get jobs.  Tells me there is a mismatch between training received in colleges and market needs.

So why is this a bubble?

Because most of these student loans are government-backed loans.  When students can’t get jobs, they can’t pay back loans to Uncle Sam.  When Uncle Sam can’t pay back loans, the bubble bursts.

Posted in: Education, Government