First the dot.coms popped, then mortgages. Are student loans and higher education the next bubble, the latest investment craze inflating on borrowed money and misplaced faith it can never go bad?
Some experts have raised the possibility. Last summer, Moody's Analytics pronounced fears of an education spending bubble "not without merit." Last spring, investor and PayPal founder Peter Thiel called attention to his claims of an education bubble by awarding two dozen young entrepreneurs $100,000 each NOT to attend college.
Recent weeks have seen another spate of "bubble" headlines -- student loan defaults up, tuition rising another 8.3 percent this year and finally, out Thursday, a new report estimating that average student debt for borrowers from the college class of 2010 has passed $25,000. And all that on top of a multi-year slump in the job-market for new graduates.
Those numbers are all alarming. But, one thing that's important about the possible student loan bubble is that it poses much less of a threat than housing debt did to drag down the entire economy. Yes, many individual borrowers may find themselves in trouble. But total student loans probably amount to less than 10 percent of outstanding mortgages. Every single student loan could default and it still probably wouldn't match total mortgage defaults during the recent downturn. More importantly, unlike mortgages, Wall Street isn't knee-deep in securities comprised of bundled student loans, as it was with mortgages.
The other big difference with student loans is the dominant role the federal government has assumed in the market in the last few years: it accounts for roughly 85 percent of student debt.
What bursts a bubble is a liquidity crisis, when borrowers suddenly can't get the money they need. Even during the depths of the 2008 financial crisis, when private student loans dried up, the government's dominant role kept student loans flowing.
That doesn't guarantee the bubble won't slowly and painfully deflate over time. But it insures against the chaos of a "crash" where suddenly students can't get loans at all -- a scenario that could shut down untold numbers of colleges whose students rely on financial aid.