ow the Banking Industry has Created a Bubble in the Student Loan Market and Inflated Prices in Education by 500 Percent since the 1980s. The $500 Billion Student Loan Market.
The dream of going to college is deeply ingrained in our society. Education is usually a political win in any campaign and few will ever argue with this topic when it is brought up. As with many things in our
current financial system creating a market where banks can enter into the fold has hyper inflated the price of higher education. Think of housing, autos, and every other banking activity and prices are likely to bubble up and burst if they are allowed to finance the activity. Yet educational costs remain high and defaults in the $500+ billion student loan market are now showing cracks like many areas of our economy. Is there a bubble in higher education?
First, I started to question the massive surge in college cost when I saw a report from one of the
too big to fail banks, Wells Fargo, showing that by 2027 the cost to attend a private four-year college will cost nearly $400,000:
Source: Wells Fargo
Now the above embedded inflation assumes that we will have inflation at a consistent pace. As we have seen in the last year, it is possible to have periods of deflation in massive bubbles. Home prices have fallen and so have wages so it would be interesting to see how college costs can rise all the while people having less money to finance their education.
Now some would argue that everything goes up in price so the rise in college prices is merely a reflection of this. This is not true. The premium to go to college is outstripping virtually every other category of consumer prices:
Since the early 1980s college tuition and fees have surged nearly 500 percent while the median family income has gone up by approximately 150 percent. Now anyone that has experience with the current college system understands how expensive things have gotten. One of the primary push to higher prices is the involvement of securitization and the banking industry pushing out loans.
The student loan market is enormous. With over $500 billion in loans this is a large market that few even consider. The biggest chunk of this market is the FFEL program which is the Federal Family Education Loan Program. In the past, there was little to fear from this market since student loan defaults were relatively tiny. Yet just like Fannie Mae and Freddie Mac propping up the
entire housing market in the U.S., the FFEL program props up the entire student loan market. This program provides lenders a guarantee from the U.S. government of 97% and a fix yield on the student loan. No wonder why this is such an enormous money pit for banks. Of course, you see above that the
corporatocracy is also involved in this market. But just like the housing market, Wall Street and the government have worked together to inflated the cost of education just like it did with housing.