All evidence points to government-subsidization as the real culprit behind rising tuition costs.

By Hannah Cox -

In his book Bubbles and Crashes, Brent Goldfarb says a bubble is much like a stock that traders keep buying because others are doing the same thing.

“This usually happens when a company or product has a compelling narrative around it that isn’t backed up by data,” Goldfarb writes. “They’re easy to invest in, there’s a lot of uncertainty about the future value, and it’s often about a lot of novice investors.”

The student loan bubble checks all of these boxes. Americans have been hearing about a student loan “crisis” for over a decade, and there’s a reason for that. Forty-three million Americans hold $1.5 trillion in federal student loan debt. The average debt per borrower is $37,127. Since the late 1970s, tuition has risen at a rate three times that of inflation.

Not only is a college degree getting more expensive, it’s doing so while arguably becoming less valuable.

The Wall Street Journal reports that 43 percent of graduates are underemployed in their first job. Of those, two-thirds remain in jobs that don’t even require a college degree five years later.

Meanwhile, the Washington Post found that only 27 percent of graduates work in a job related to their major. And estimates show that the rate of return on a degree has been decreasing since the Great Recession.

Already, over 1 million people default on their student loans every year. Some studies estimate nearly 40 percent of borrowers could follow their lead by 2023, leading many to warn of the coming student loan bubble.

One trait all bubbles share is an obscured understanding about the value of a commodity relative to its actual worth. In this instance, it’s why you see people paying $100,000 for a degree in graphic design that might pay them $40,000.

Sometimes, the debt is even more. Just ask Shaun Dunn, a 38-year-old 3-D designer who racked up more than $400,00 in student loan debt after attending the Academy of Art University in San Francisco.

“I just feel they were dishonest, saying you’ve got this great future in front of you,” Dunn told the San Francisco Chronicle earlier this year. “But I feel we were ripped off. Bamboozled. Tricked.”

As of February, Dunn had no job, owed $431,607, and was bankrupt.

The Real Root Of The Problem

So, given these circumstances, why do we continue to see young people paying small fortunes to earn these degrees—especially those that offer little prospect of earning potential?

It goes back to Goldfarb’s point on the importance of a compelling narrative in the making of a bubble. Americans have been told the only way to upward mobility, respectability, and the American Dream is through a college degree. We sell this narrative to 18 year-olds (novice investors) and we make it really easy for them to invest in the model (government loans). If we wanted to create a bubble, I’m not sure you could have found a better way to do it.

So what happens if the bubble bursts? In the 2008 financial crisis, millions lost their jobs, their retirement savings, and their homes. That crisis bears many similarities to this one. Students take out and are given loans with little attention paid to their prospective ability to repay the debt.