Are Student Loans the Next Financial Bubble?

The Huffington Post recently reported that there is fear of a higher-education spending bubble because of a continuing depressed job market and rising student loan debt. Citing data from the Federal Reserve Bank of New York, the article reported that outstanding student loan debt has increased 25 percent since the start of the financial crisis in 2008, whereas other forms of consumer debt (mortgage debt, auto loans, and credit card debt) have decreased. Delinquency rates for student loans are also increasing.

According to a July 2011 report by Moody’s Analytics, “[f]ears of a bubble in educational spending are not without merit.” Some of the reasons for increased student lending demand is a rise in the (1) number of high school students pursuing higher education, (2) cost of education (tuition and fees have more than doubled since 2000), and (3) number of for-profit schools. Further, in the past decade (1) colleges have directed students towards larger loans because of available government and private credit, (2) endowments have declined, and (3) state funding for many universities has been cut. Student loans are also considered more profitable because they are likely non-dischargeable in bankruptcy.