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Student Loans: A Different Financial Market *

February 12, 2013

The rise in educational debt in the United States over the past decade has raised concerns over the
possible emergence of another financial bubble, and more fundamentally, challenged the
established assumptions of the value of a college education for all students.
-John E. Silvia, chief economist, Wells Fargo
-Sarah Watt, economic analyst, Wells Fargo

The rise in educational debt in the United States over the past decade has raised concerns over the
possible emergence of another financial bubble, and more fundamentally, challenged the
established assumptions of the value of a college education for all students. In our view, the
proliferation of student loan debt is a result of the unique characteristics of the educational debt
market. Moreover, the credit model for student loans is very different from other forms of credit. 

Yet in some ways, issues surrounding the student loan market mirror those with the Social
Security and Medicare programs. Simply put, the economic framework around each of these
programs has evolved and altered the actual functioning of the program over time. For education,
what once was a clear and assured path to landing a good job is no longer so certain.
Meanwhile, the emergence of each of these federal programs has had a feedback effect on the
economy as well. More students are heading to college than ever before and entering the
workforce later. Upon arrival in the working world, they face more competition from other college
degree holders and are increasingly saddled with debt at a time when income growth is limited.
Our challenge as analysts is to understand the models underlying these programs, not as they are
idealized, but as they are currently functioning.

 

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