NCPA - National Center for Policy Analysis

Why the Education Bubble Will Be Worse Than the Housing Bubble

July 2, 2012

The problem with student loans is not the interest rate but that the federal government subsidizes student loans at all, say Antony Davies of the Mercatus Center and James R. Harrigan of the Institute for Humane Studies.

The potential harm of government intervention in the student loan market is not unlike the damage caused by similar intervention in the home mortgage market.

  • The government, in a fit of social engineering spanning decades, established Fannie Mae and Freddie Mac to make real the dream of home ownership for working class Americans.
  • Beginning in 1996, the Department of Housing and Urban Development told Fannie and Freddie that more than 40 percent of their loans had to go to low-income borrowers.
  • Further, starting in the early 1990s, the Federal Reserve pushed interest rates to historically low levels, making mortgages cheaper.
  • The net result of this was very predictable: people took out more mortgages and an increasing number of mortgages went to low-income people.
  • Between 2001 and 2006, the fraction of new mortgages that were subprime (and consequently unlikely to be paid back) tripled, and the rest, as they say, is history.

This is the exact result we can expect from continued government intervention in student loan markets.

  • The Affordable Care Act of 2010 allowed the government to loan money directly to students.
  • The following year the Taxpayer Relief Act extended tax breaks to student loan borrowers.
  • Predictably, the Federal Reserve kept interest rates at historically low levels, making college loans cheaper.
  • And the price of a college education soared -- just as one would expect from a market flooded with cheap money.
  • By law, lenders cannot even deny Stafford and Perkins loans (types of federal student loans) based on the borrower's credit or employment status.

The result: from 1976 to 2010, the prices of all commodities rose 280 percent, the price of homes rose 400 percent, and the price of private education rose 1,000 percent.

Source: Antony Davies and James R. Harrigan, "Why the Education Bubble Will Be Worse Than the Housing Bubble," U.S. News & World Report, June 12, 2012.

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