The Student Loan Bubble: Deflating Just a Bit?

The three charts below help tell part of the "higher education bubble" story by looking at student loan volume using data from the Department of Education.  The first chart shows the actual gross student loan volume from 1994 to 2007, and the projected student loan volume from 2008 to 2017.  Here's what happening:

1. Between 1994 and 2006, student loan volume expanded by almost 7 times, from $23 billion in 1994 to $156.6 billion, for an average annual increase of more than 17%.

2. From slightly less than $40 billion in 1998, student loan volume more than doubled to $80 billion in just five years by 2003 ($87.5 billion), and then almost doubled again over the next three years, reaching $156.6 billion by 2006. 

3. After decreases in student loan volume in 2007 and 2008, the Department of Education predicts ongoing increases starting this year, reaching $214 billion by 2017, which will be 10 times higher than the amount in 1994.

Part of the increase in total student loan volume is from the increase in the number of student loans, which has more than tripled from 6.5 million borrowers in 1994 to almost 20 million borrowers this academic year.  The chart below shows the actual average student loan amount from 1994 to 2007 and the projected amounts from 2008 to 2017.  

1. The average student loan amount almost doubled between 1994 to 2005, from $3,543 in 1994 to $7,311 in 2005, and reached a peak of $8,706 in 2006.  

2. Following declines in 2007 and 2008, average loan amount started increasing again in 2009, and is projected to top $8,000 again by 2015.  

     

Of course, the dollar amounts above have not been adjusted for inflation or compared to income levels, so the chart below shows the average student loan amount as a share of median household income, from 1994 to 2008.

1. After remaining stable at about 11-12% of median household income between 1994 and 2001, student loans as a share of income climbed to more than 18% in 2006, before declining to 15.5% in 2007 and 13.6% in 2008. 

2. Another way to look at student loans: In 1994, median household income ($32,264) was about 9 times the average student loan amount of $3,543, but by 2006 median household was earning income ($48,201) that was only 5.5 times the average student loan amount of $8,706. 

From Glenn Reynolds in the Washington Examiner:

"As with the housing bubble -- cheap and readily available credit has let people borrow to finance education. They're willing to do so because of: 1) consumer ignorance, as students (and, often, their parents) don't fully grasp just how harsh the impact of student loan payments will be after graduation; and 2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

Student loan demand, according to a recent report in the Washington Post, is going soft, and students are expressing a willingness to go to a cheaper school rather than run up debt. Things haven't collapsed yet, but they're looking shakier -- kind of like the housing market looked in 2007."

MP: The data in the charts above do support the fact that student loan demand has been going soft in both 2007 and 2008, and part of that might be the effects of the recession.  But hopefully it's also because reality is setting in, and students and their parents are becoming more cost-conscious and now less willing to run up huge amounts of student loan debt.  When just the average student loan amount (and many students have more than just one student loan) is approaching 20% of median household income, like in 2006, that seems like an unsustainable situation.  As Michael Barone wrote recently:

"Government-subsidized loans have injected money into higher education, as they did into housing, causing prices to balloon. But at some point people figure out they're not getting their money's worth, and the bubble bursts." 

Hopefully, the recent declines in student loans (the average loan declined by almost $2,000 from $8,706 in 2006 to $6,830 in 2008), means that the higher education bubble might be deflating just a little bit.