Why the Education Bubble Will Be Worse Than the Housing Bubble

And housing prices soared—just as one would expect from a market flooded with cheap money. With the government using Fannie and Freddie to transfer mortgage risk from private banks to U.S. taxpayers, and with the U.S. Congress minding the store, mortgage lenders didn’t have to care about the riskiness of the loans they made.

Antony Davies is an affiliated senior scholar at the Mercatus Center at George Mason University and an associate professor of economics at Duquesne University. James R. Harrigan holds a Ph.D. in political science and is a fellow of the Institute of Political Economy at Utah State University.

Absent congressional action, the interest rates on federally subsidized student loans will double to 6.8 percent on July 1. Both President Barack Obama and former Gov. Mitt Romney have urged Congress to act before that deadline, but no one seems willing to state the obvious: The problem is not the interest rate but that the federal government subsidizes student loans at all.

To understand the impending fallout from government intervention in higher education lending, consider the recent housing bubble.

The anatomy of the mortgage crisis is simple. The government, in a fit of social engineering spanning decades, established Fannie Mae and Freddie Mac to make real the dream of home ownership for working class Americans. Beginning in 1996, the Department of Housing and Urban Development told Fannie and Freddie that more than 40 percent of their loans had to go to low-income borrowers. Tax breaks followed. Finally, starting in the early 1990s, the Federal Reserve pushed interest rates to historically low levels, making mortgages cheaper.


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