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The higher education bubble continues to inflate

Just as the housing crisis was fueled by government demands that banks make it easier for buyers to get a mortgage (e.g., no down payments, floating interest rates, interest-only mortgages, stated income), now we have the emerging student loan/higher education crisis that is being fueled by government demands that students have easier access to credit to finance their education. I'm not the first to discover this, of course, as it's been actively discussed for years. But I will offer a few charts which shed some light on the subject.

In the first chart, we see that student loans started growing explosively in early 2009, after being essentially unchanged for the previous eight years. All of the increase in student loans since the end of 2008, $385 billion, was issued by the federal government, which has now essentially co-opted the entire student lending industry. Private lending in the student loan market has not increased at all over this this same period. The government has taken over and the mandate is to increase loans no matter what. Student loans are the only part of consumer credit that has expanded post-recession. Consumers in aggregate are deleveraging, but students are leveraging up, and many in a big way. As a percent of consumer credit, student loans are exploding skywards: up from 4% at the end of 2008 to 18% today.

This will inevitably end in tears for taxpayers, as well as for the students who have taken on onerous levels of debt. Colleges and universities will also suffer, since federal largesse in the form of a flood of new loans has enabled education costs to reach levels that are way out of line with the rest of the economy. Sooner or later, when the student loan plug is finally pulled, colleges and universities will find themselves forced to undergo the same painful restructuring and cost-cutting that has devastated the residential construction sector for the past six years.

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