Originally posted on Eye on Housing:
On July 1st, among other changes, interest rates on newly originated Stafford student loans are scheduled to increase from 3.4% to 6.8%. Due to this looming deadline, there has been a lot of attention paid to the rising amount of student loan debt. Some of this commentary goes as far as saying that recent data indicate a bubble exists for student loans, one that will burst with negative consequences for housing and other parts of the economy.
The analysis below indicates that some of these claims may be exaggerated. It is true that outstanding student loan debt has risen. But the data suggest that, in part, this rise in explicit student loan debt is in fact a shift of the source of higher education financing – one related to housing itself. Namely, with the onset of the housing crisis, there was a decline in the availability of home equity loans, often used to finance higher education of children by homeowning parents or to finance other large expenditures, thus freeing resources for college expenses. Consequently, students are more likely to take out student loans on their own behalf.
The data thus do not necessarily reveal a sharp increase in borrowing for college education, but rather a shifting in the form of borrowing. And this is yet another consequence of the harm inflicted on the middle class as home prices fell, leading to a nearly 40% decline in median household net worth.