College Tuition Is About To Collapse Violently

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The WSJ reports on one debt bubble that has yet to pop, and is still inflating at an insane rate:

New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion. The amount of money students borrow has long been on the rise. But last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95, according to figures used in President Barack Obama’s proposed 2010 budget.

The sharp growth is “definitely above expectations,” says Robert Shireman, deputy undersecretary of the Education Department. “But we’re also in an economic situation that nobody predicted.” The eye-opening increase in borrowing is largely due to the dire economic environment, which is causing more people to seek federal loans, he says.

Clearly this can’t keep on going like this. All this student loan debt is crazy, especially considering the likely earnings power of many of these graduates. Despite the desire to see more subsidization of college, we suspect there will be a collapse in student loan debt availability and desire to take on new debt.

But! It’s not all bad news. A lot of people still have a conception of there being a handfull of elite, Northeast schools out there, followed by a whole mess of “safety schools,” that are only worth going to if you don’t get into your “reach schools.” The reach schools are deemed to be worth it at any price, which explains the price inflation.

But when the air gets let out of the student loan market (and students themselves come to their senses) they’ll realise that there are tons more high-quality schools than there used to be. State schools have gotten better and more competitive, as have a lot of smaller liberal arts schools. This trend isn’t new. Vassar and Haverford weren’t always seen as all that desirable, but now have high admissions standards, owing to the number of applicants.

When the information about the multitude of good schools gets out there, and the conventional wisdom starts to change, price competitiveness will become severe, and fast. With debt exploading like this, it can’t be that long before reality returns.

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