Nov 19, 2011 | Post by: Prateek Agarwal No Comments

The Education Bubble

Recently more and more people have begun to feel that higher education will be the next big bubble to burst. The idea is that since higher paying jobs require degrees, people are willing to take out loans to pay for college and later pay off the loans when they have a well-paying job.

The Next Bubble to Burst?

Numbers

Average Income for an Advanced Degree (Masters or PhD) - $83,144

Average Income for a Bachelor’s Degree –  $58,613

Average Income for a High School Diploma – $31,283

Even though it suggests that the more advanced degree you have, the higher your earnings are, that might not be the only reason though. If you are good enough to get into a good university, then you already have the skills and experiences that help you get a better paying job.

“In 2010, the College Board reported that annual tuition and fees averaged $2,713 at two-year colleges, $7,605 at public four-year colleges for in-state students and $11,990 at public four-year schools for out-of-state students. It is the cushy private four-years, with average tuition and fees of $27,293, that make college seem so expensive.” (Is it really the next bubble?)

Freddie and Fannie estimate college related outstanding debt to be $757 billion, with a default rate of 8.8%. That’s almost 10 times the rate for credit cards and car loans. The outstanding student tuition debt is said to be closer to $1 trillion.

The Problem

  • The entire philosophy of taking out a loan to pay for an education that makes you a lot more money in the future isn’t working anymore.
  • The current student loan system isn’t designed to survive many years of high unemployment.
  • One of the biggest problems in recent years is that people with these degrees haven’t found jobs or jobs that pay as high as they expected their degrees to earn.
  • Students are continuously taking riskier and unregulated loans that they could end up defaulting on.
  • Student loans generally have higher interest rates, and unlike a default on a house loan, with a student loan you cannot file for bankruptcy. The assumption is that since education is an asset, which can’t be repossessed, otherwise the person who benefited would just pass the debt on to taxpayers.

Sources:

Economist – The Indebted Ones

Economist – The Next Big Credit Bubble?

Economist – Higher Education: Is it really the next bubble?

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