The Parallels of the Housing Loan and Student Loan Bubbles

One kind of predatory lending is the practice of giving loans to those you do not believe can pay back the loan, yet you give them the loan because you expect you will profit from giving them the loan. Many current student lending practices are such a form of predatory lending. This becomes especially clear when we examine the housing loans crisis and see the similarities.

Just as it is a great policy to, ceteris paribus, increase the percentage of Americans owning homes, it is also a good policy to, ceteris paribus, increase the percentage of Americans with college degrees. (Problem is we ain't got no ceteris paribus.) Just as we should have policies in place that make Americans more capable of paying off their housing loans, we also need policies to help make Americans better capable of paying off their student loans. However, just as it is predatory to give Americans home loans the lender does not believe will be paid back, it is similarly wrong to give Americans student loans the lender believes will not be paid back. Giving a loan to someone you believe can't pay it just so you can make a profit is a predatory lending practice, because it doesn't help the recipient of the loan.

But enter the lobbyists. In the housing bubble, lenders and home builders "convinced" (i.e. donated large amounts to elected officials, etc.) the government to not only insure loans that were not expected to default, but also to insure loans that would likely be defaulted on. Similarly, lenders and higher education institutions have "convinced" the federal government to not only FAPP insure student loans they expect not to be defaulted on, but also to FAPP insure student loans they expect to be defaulted on.

Because housing loans were insured, it didn't matter who lenders gave money to, because they would make money from home buyers if they didn't default, and make money from what is basically tax dollars if loans were defaulted on. Similarly, lenders could give money to students, regardless of their ability to pay back, because they made money from the students who didn't default, and FAPP from taxpayers when students defaulted.

Because more people could get more housing loans, more people could buy homes, which increased demand, and thus increased the price of housing. Similarly, because more people could get student loans, more people could pay for higher education, which increased demand, and thus increased the price of higher education. Between 1995 and 2005, real housing prices doubled. Over the last 30 years, the higher education prices have grown three times greater than the rate of inflation, which is about 9% per year. Home builders and education builders (i.e. higher education institutions) made killings in these booms.

The mythology that had been built was that the housing boom could not go bust because housing prices would not go down. Between 1945 and 2005, nominal housing prices never fell. As long as they never fell, homeowners would not go under because they could always get a new housing loan to pay off their old loans. Nobody would get hurt by lenders giving loans to people they knew couldn't pay the loans back with their own money, because prices have always increased since 1945, and of course nothing happened before 1945. Of course this was a myth and it burst when housing prices actually fell, which prevented people from taking out a home loan to completely pay off their previous home loan. With no other source of money to pay off their previous home loans, you had massive defaults at one time, which no insurer could cover without a taxpayer bailout for predatory lenders that knew that many home buyers could not afford the loans, but relatively nada for home buyers who were told by the expert lenders that they could afford the loans because housing prices would always go up.

The mythology that has been built around higher education is that the education boom can't die. Demand will always be increasing for higher education, because those with college degrees make umpteenth times as much over a life time with a college degree than those with only a high school degree. Those who don't go to college take themselves out of lucrative careers in medicine and law. Education prices have been growing faster than inflation for decades. They can't fall. And no education lending bubble has burst and no education lending bubble exists which will burst.

Of course, this too is false. The most likely cause of the higher ed collapse will be online education. Right now, due to physical constraints, there are only so many seats for students an institution can have. But with online education, a university simply has to hire some non-tenured instructors with bargain basement salaries, some additional tech support, and presto, you can multiply the size of your student body. Now some express concern that online education is not as good as in-class instruction in terms of student learning. That's a legitimate question to be concerned about if you care about student learning, but it really doesn't matter at the end of the day because education is not the primary issue of research institutions. Higher education institutions don't care about learning, they care about delivering it at the cheapest price possible, while it still being considered education. Research institutions have been doing this for decades in undergraduate education, and unfortunately this doesn't seem to be likely to change anytime soon given the financial incentives of the system.

In any case, online education will be a boon for the Harvards and Georgia Techs of the world. But it will be a death blow for research institutions that lack the financial resources of a Harvard. Why? Well consider this. Suppose you got accepted to Harvard's online undergrad degree program and to John Hopkins' on-campus undergrad degree program, which would you choose? Many would pick Harvard's online program despite John Hopkins status as one of the premiere research institutions in the world. This is not purely hypothetical. A few years ago, there was an article in the New York Times that chronicled how many undergrads were turning down admissions offers from John Hopkins and other schools to get a degree from Harvard's Extension program.

What will happen is that people who are currently attending on-campus degree programs at less well funded universities will start joining online degree programs at better funded universities. But this implies that the least well funded universities will have no students. But these universities have based their budgeting on the assumption that money coming from undergrads will keep growing at 9% per year. With the students gone, these schools will not be able to pay the bills they have accrued over the years. And they will go under or will be transformed into institutions that would be unrecognizable from what they are today.

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