Monday, July 22, 2013

Student Debt Bubble

"Will Student Debt Be America's Next Financial Bubble?" is the latest of a number of articles/blog posts to wonder aloud whether student debt will lead to another financial crisis. The authors of such pieces have every right to be worried about another financial crisis as the root causes of the last one largely went unaddressed by Dodd-Frank and other regulatory reforms. I think student debt an unlikely first cause of the next crisis, however, because a market blowup would require a level of unemployment among recent grads not likely to be achieved without some other major economic shock occurring first.

Student debt is not a cause of the financial problems facing U.S. Higher Education sector but rather a symptom of high and rising costs. A widespread reorganization of the sector is in the offing: some schools will close; others will merge; others will look drastically different in five years. The cause of high tuition I ultimately trace to colleges having the wrong ownership structures: state ownership; stockholder ownership; and trustee ownership all create dreadful incentives for containing costs while maintaining quality. See my Fubarnomics for details and solutions.

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