The Next Crisis? An Analysis of Higher Education and Student Loan Debt in the United States

Open Access
Friday, Kelly Margaret
Area of Honors:
Bachelor of Arts
Document Type:
Thesis Supervisors:
  • Russell Wade Cooper, Thesis Supervisor
  • Dr. Russell Paul Chuderewicz, Honors Advisor
  • Economics
  • Student loans
  • Bubble
  • Higher education
  • Student loan debt
  • Housing bubble
This paper approximates student loan systemic risk, building off the hypothesis that student loans could potentially prop up a bubble in higher education. Price bubbles reflect increasing prices above fundamental value. With future wages’ signaling a quantifiable fundamental value as a return to education, a higher education price bubble would exhibit inflated tuition prices increasing at a faster rate than that of future wages. I identified possible bubble movement in comparing student loans and 2008 mortgages, whereby I created a model to analogize these market movements. Furthermore, I estimated consequential market leverage, returning results that reflected greatest increases in leverage for ranges that generally fall in line with “jumbo loans” in the United States. Finally, I expanded off of a Federal Reserve staff paper to further examine the influence of student loan supply on debt and tuition, whereby I identified a structural break that occurred with student loan policy changes in 2008. I concluded that the greatest concern for a bubble falls with students in generally lower-earning fields of study. A higher education price bubble could be fueled by the relationship between tuition and expected future wages, with student loans’ assisting tuition increases. Student loans magnify education returns, expanding students’ current budget constraints to cover higher education costs, but posing a challenge to students who cannot timely repay their loans. The overall average return to education remains positive, thereby suggesting that a price bubble in higher education may not exist. However, broken down, the returns to higher education are sometimes negative for students in lower-earning fields of study. If students with lower expected future wages continue to invest in higher education, then tuition prices would be increasing at a faster rate than that of the expected future returns, suggesting inflated tuition prices relative to immediate future wages and suggesting a potential price bubble.