The next financial bubble to burst?

As described in this Huffington Post column, Moody's has joined many economists in warning of a bubble in higher education, and the impending burst of the bubble in higher education financing. In short: Students are racking up more and more debt--through more people enrolling and to people staying in school longer to avoid the harsh realities of a less than stellar labor market--but they are unable to pay off the loans because they are not getting jobs or are not getting high-paying jobs to warrant such debt accumulation. Thus, there is a wave of defaults and bankruptcy building (although much education debt is excluded from bankruptcy proceedings, not allowing the individual to avoid payment).

But, even when they get it, they don't get it. The author writes: "In the short term, if fewer people pursue higher education and avoid student debt altogether, it would cause a drag on consumption. In the long term, a less educated workforce would put the U.S. at a disadvantage." This could not be more wrong, and it is clear that the author simply doesn't understand what the idea of a bubble. The fact that there is a bubble in higher ed--as described above--indicates that the investment in human capital is malinvestment for a sizable share, although certainly not all or even a majority, of those getting a college degree. This means that they would have been better off to have never went to college (or accumulate higher ed debt).

Yes, it is quite likely that spending in the short-run would be lower had these individuals not taken out debt to attend college. But, that's a good thing! The spending would have been more appropriately directed and the loanable funds would have been freed up for other more productive purposes.

The comment concerning a less education workforce holding back the U.S. in the long-run is ridiculous! It's the debt accumulated through the malinvestment in higher education that is currently holding back the U.S. We have a well-educated population, but much of that education is in areas that are not valuable to society. There are only so many people needed with BAs in Basket Weaving (I will allow you, the reader, to fill in actual majors to which this comment applies so as to not directly offend any of our readers). We are spending billions of dollars to obtain degrees that will enable us to earn less marginal income (the extra income beyond that which could have been earned with the next lower degree) than it cost to earn the degree itself. In other words, we are spending $100 today (through borrowed funds) in order to earn $90 in the future. This is a losing situation. The solution: stop encouraging so many people to get a college degree. Just like not everyone should own a house, not everyone should hold a college degree. The author of the Huffington Post got it backwards. S/he should have said: The over-investment in human capital--the college degree--is one of the many things holding the U.S. back in the long-run.

Note: the idea of the higher education bubble was first brought to my attention in 2009 by one of my students, Eliska Repkova, who is currently working toward her PhD in economics at Emory University.

HT: Ed Miseta