Student Loan Bubble

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    On Economic Policy Journal, Robert Wenzel writes:
    “Education and housing are both part of the capital goods sector, since they supply benefits over many years.” Is this true? If yes, can’t we apply Austrian Business Cycle Theory to the current student loan market? Interest rates remain very low. College costs are rising. Student loan debt is enormous. The government subsidizes the loans and directing money into that sector…
    Some peopel claim there’s a student loan bubble. Can it burst the same way the housing boom turned into a bust?

    Here’s the link to the article although it had nothing to do with my actual question:


    The only thing is I don’t understand what would burst? It’s not like we’ve brought about an oversupply of higher education with no one to fill the universities. Or is it exactly that, since without govt subsidized loans the universities would not be full?


    Sometimes I read that students can’t find a job even after years of college. Maybe the demand for people with college degree in the labour market is not high enough to justify the high number of students in college. I’d love to hear Dr Herbener’s take!


    The government reallocates resources through both fiscal and monetary policy. Expansion of production in areas stimulated by fiscal expenditures are not self reversing as the production in areas stimulated by monetary inflation are. For example, the build up of public education, funded through taxes and expenditures of the state, is sustainable as long as the budget is intact. (Of course, the state’s budget deteriorates during the bust and some cutbacks may occur in public education, but it’s not like liquidation in the private sector.)

    Higher education is partly funded through budgets and partly through private credit. So, the build up in higher education over the years has not been purely through credit expansion. But, the build up of higher education was much more rapid from 2000-2010 than it was from 1990-2000.

    Some of this expansion in enrollment has been financed by credit and a growing portion has been by private credit. In assessing the prospects for the future it’s one must also keep in mind that some downsizing at universities after the financial collapse because of budget cutbacks and declines in university endowments has already been done. And, the credit financing of higher education has been steadily rising, not spiking in the last few years:

    If there is a bubble that will pop, it will likely happen upon the recognition by potential borrowers that “investment” in higher education will not pay off. If their withdrawal from higher education is significant, it will force some institutions into bankruptcy. For them to liquidate their campuses, the prices of their assets will have to collapse. Construction will be affected. Lots of highly paid administrators and tenured faculty will have to take big pay cuts.

    Given the state’s desire to have a kept intellectual class, I think it less likely it will sit by and watch a significant collapse of higher education than some private industry.


    Very interesting. Perhaps if potential borrowers stopped borrowing so much (or there was less credit available for borrowing), then colleges would be forced to LOWER TUITION COSTS? Otherwise they could go bankrupt real fast. Peter Schiff and Ron Paul have made this point before, but it seems to make more sense in the light of Professor Herbener’s analysis.

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