Wednesday, April 23, 2008

A Tuition Bubble? Lessons from the Housing Bubble

By Andrew Gillen

Our new study, A Tuition Bubble? Lessons from the Housing Bubble has just been completed. There have been quite a few new developments since we sent this off to get printed.

Pete Davis provides a concise summary of what's going on:

First, the mortgage crisis has driven investors away from securitized assets, including student loans. That has driven up the cost of financing student loans beyond the interest income and fees from those loans.

Second, last year, the law on student loans was changed, effectively cutting the federal subsidy in half.

Third, a pitched battle has been fought mostly between Republicans and Democrats over who should make student loans. When President Clinton came to office in early 1993, he was able to establish direct lending from the taxpayers to students, but just about every student loan bill until last year's pared back direct lending in favor of private lending.

The report goes into detail on points 1 and 2. As for point 3, the New York Times reports that 43 lenders have left the government loan programs, and that the Department of Education is preparing to step in to provide capital.

These developments fit right into the analysis, though I never would have thought that things would progress so quickly

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