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Diploma bubble?

By John Published: January 14, 2011

On the one hand, we have an oversupply of college graduates, according to this report, "From Wall Street to Wal-Mart: why college graduates aren't getting good jobs," by the Center for College Affordability and Productivity.

Evidence shows that currently more than one-third of college graduates hold jobs that governmental employment experts tell us require less than a college degree. That proportion of underemployed college graduates has tripled over the past four decades.

On the other hand, college debt now exceeds credit card debt, according to this story from the Detroit Free Press via USA Today.
     With tuition far outpacing inflation for the past 20 years, student borrowing has continued to grow a whopping 25% last year. Some students who are borrowing never expected to, but their parents have lost jobs or suffered other financial setbacks in the recession.
     Dramatic drops in home values also have made it far tougher for some parents to cover college costs by simply taking out a home equity loan.
     For many college grads, that monthly student loan payment is turning into quite a scary number.

And many of those students are defaulting on those loans, says the Chronicle of Higher Education:
According to unpublished data obtained by The Chronicle, one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.

 So, could there be a student loan bubble similar to the housing bubble brewing on the horizon? Consider a new acronym we all might be hearing more about soon: SLAB.  A SLAB is a student loan asset backed security. You might recall that mortage backed securities, sausaged together from bits and pieces of thousands of home loans of varying risk, played a significant role in the worst economic crisis since the Great Depression. 

Here's two takes on the possibility of a student loan bubble:

Farnoosh Torabi at Creditbloggers  is told most of the debt is government-backed, so no need to worry, though she's withholding final judgment.

Mark Kantrowitz, publisher of FinAid.org says there's no threat of a bubble bursting. In fact, he argues, there's no bubble to begin with.  A bubble involves investor speculation leading to extremely inflated prices. But the price of a college education, Mark says, is ''driven largely by fundamentals.'' ''There is no secondary market for buying and selling a college education,'' he says.

He also stresses the fact that most student loans – about 90% – are federally-backed and guaranteed. So if the relatively small market for private SLABS goes belly up, it wouldn't cause much of a stir.  ''Even if there were an increase in default rates, it wouldn't cause a collapse of the capital markets,'' says Mark. Plus, as he points out, federal education loans since July 1 of this year have been made through the Direct Loan program, which, again, stem from the federal government.  ''[Student loans] don't suffer from liquidity constraints…or more to the point, if the US Treasury were to have trouble raising funds, we've got bigger problems than just student loans,'' he says.


Alan Nasser and Kelly Norman of The Evergreen State College in Olympia, Washington, writing for  Counterpunch aren't quite so optimistic:
Most of those affected by the meltdown of 2008 had completed their education and were either employed or retired. The student loan debt bubble signals a generation that enters the [world] of paid work cursed with what is more likely than not to be a life of permanent indebtedness and low wages.
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