Student Loans: Crisis, Bubble, or Manageable Policy Issue?

  Perspectives - Masthead 

By Sandy Baum 

Almost every article on student loans—whether in the popular press or in policy circles—cites these two factoids: Total student debt now exceeds $1 trillion dollars, and total student debt is higher than credit card debt. Some also warn that student loan debt is the next “bubble,” comparing it with the housing bubble that devastated the economy in 2008. 

The appeal of these dramatic statements is a sign of how eager people are to simplify the story—and to describe a crisis. But allowing this perspective to dominate the conversation about paying for college has the potential to make students and their families believe that borrowing for college is a bad idea. Since many families can’t fund postsecondary education without loans, the hype could discourage enrollment.

Credit Cards versus Student Loans 

It’s not that these statements are incorrect. The issue is that credit cards, mortgages, and student loans are very different financial vehicles used in very different ways. Outstanding credit card debt has fallen from about three times the outstanding student loan debt a decade ago to about 70 percent now, because credit card debt and student loan debt have moved in opposite directions over the past decade. Credit card debt is dropping for several reasons: credit debt can be discharged in bankruptcy and banks have stopped sending everyone a new credit card every day. People have realized that debt is risky and that putting new TVs on a high-interest credit card is not such a good idea. However, that’s not the same as paying for a portion of their investment in a college education with a federal student loan. If we put stricter limits on federal student loans, it is likely that more people would put college on credit cards and student loan debt would fall below credit card debt. Should we feel good about that?

What Is Outstanding Student Debt?  

The Federal Reserve Bank of New York reports that total outstanding student loan debt was $986 billion in the first quarter of 2013. That’s a considerable sum, but it certainly doesn’t mean that student loan debt is taking over the economy. Outstanding education debt includes the debt that undergraduate students, graduate students, and parents borrowed years ago and have not yet fully repaid; however, much of it is the debt of current and recent students and families. Outstanding debt grows if the volume of new loans exceeds the amount repaid. Individual education loans are generally paid off over longer periods of time than credit card and auto debt. And with more students enrolling in college, it is only logical that total student debt will grow. 

Between 2001 and 2011, the total number of postsecondary students grew by 32 percent, from 15.9 million to 21 million. Each student is borrowing more on average, but the growth in debt per student has been much slower than the growth in the number of students borrowing. In recent years, total federal loans have grown about twice as fast as federal loans per student. That’s because of rapid enrollment growth. In other words, it isn’t that students are borrowing more loans; it’s that more students are enrolling and borrowing.

What really matters is whether individual students are borrowing reasonable amounts and getting the best available loans. Some students do borrow too much and we should find ways to discourage that borrowing up front. They are particularly at risk if they rely on private or alternative loans, which do not come with the repayment protection of federal student loans. Among students who began their postsecondary studies in 2003-04, 68 percent had accumulated less than $10,000 in debt by 2009, 15 percent had borrowed more than $20,000 for their undergraduate education, and only 2 percent had borrowed more than $50,000. If we look only at bachelor’s degree recipients (i.e., excluding borrowers in associates’ or certificate programs and those who left school before completing their program), the debt levels are higher, but so are post-college earnings.

People tend to compare individuals with student loan obligations to those with similar earnings who do not have the same debt. It’s not a surprise that the consumption options of former students who borrowed are more limited than those whose parents paid their way. But what if those students hadn’t borrowed? Chances are they would not have had the same education, job, or earnings. The more important comparison is between the students’ opportunities with a college education and some debt and their opportunities if they did not attend college at all.

Refuting the Bubble Argument 

But are student loans the next “housing bubble”? Absolutely not. Student loan debt has risen to 9 percent of total household debt. In comparison, mortgage debt constitutes 71 percent of the total debt. Even if everyone defaulted on their student loans, we would not have another economic collapse.

Further, student loans and mortgages are completely different. To simplify a complex issue, the housing loan crisis occurred when people bought houses with mortgages they could not afford expecting the prices of the houses to rise. They thought they would be able to sell those homes at a profit, but interest rates on many of these mortgages rose and prices collapsed. Many homeowners ended up owing the bank more than the equity they had in their homes and many were unable to make the required payments. Selling wasn’t viable and those who lost their jobs or were victimized by predatory lenders often couldn’t make the payments.

No one is buying a college education in the hope that they can sell it in the future for a higher price. Students pay for college with the hope that the combined knowledge and credentials they receive will increase their future earnings, raising their standard of living and allowing them to repay their loans. It won’t be a problem for today’s students if future students pay higher or lower prices for college. It would be a problem, however, if college graduates started earning less than high school graduates, or even if the gap between the two were to close. That is not going to happen. Employers will not simply wake up one day and decide that they no longer value education.

Refocusing on Borrowers’ Needs 

Headline-grabbing statements about high aggregate loan debt don’t help the students who need our attention. We should focus on the debt levels of individual students. We should improve the policies in place to protect students against circumstances beyond their control that lead to repayment problems. And we should provide incoming students with better information and advice so they don’t make poor education and career decisions or borrow excessive amounts.

Sandy Baum, Ph.D. is an independent higher education policy analyst, a senior fellow at the Urban Institute, a senior fellow at the George Washington University Graduate School of Education and Human Development, and professor emerita of Economics at Skidmore College. 

Do you agree with Sandy's assertions? Do you have a different point of view? We want to hear your thoughts on the matter! Join the discussion below in the comments section. 


  • I agree with Feudi that the author may not have taken into consideration the secondary impact of student loan debt--young adults postponing buying houses and cars, having children, establishing credit, etc,. In other words, things that move our consumer-driven economy forward. However, I think this is just part of the larger conversation on the rising cost of college.

  • I appreciate Dr. Baum's perspective on this. It is refreshing to look at it from a different angle.

  • Feudi,

    I disagree and believe you missed Ms.Baum's point. A college education is not a rare painting that increases in value the longer you keep it. Students borrow money for their education with the expectation that the debt can be repaid with their future earnings. I do not see why you would consider this selling to the highest bidder.

  • Ms. Baum wrote: "No one is buying a college education in the hope that they can sell it in the future for a higher price." I disgaree completely with this statement. Why would students attend college at all if they did not hope to sell their education to the highest bidder after they graduate? Very strange that Ms. Baum does not grasp the very basis for attending college for most people today.
    I agree that student debt is not a bubble...yet, but that doesn't mean there will be no societal repurcussions if we see significant defaults on a trillion dollars of student debt. These debts are now recorded with all the major credit rating agencies and as Ms. Baum noted, cannot be discharged through bankruptcy. That means defaults will negatively impact everything else a young person does after college such as buy cars and homes, have children, travel - you name it. So yes, student loan defaults could implode the economy just as the small percentage of bad home loans imploded the economy five years ago when the bad loans were packaged with good mortgages and sold as securities.

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