Why did the housing bubble burst starting last year? Government policies caused vast sums of capital to flow into the housing sector. This created a cycle in which prices rose, and thus ever more capital was required. Mortgage debt — direct and derivative — increased to dizzingly levels. It all worked until the markets suddenly realized that Bear Stearns had way too much risk based on mortgage derivatives. At that point, the whole thing unraveled; capital disappeared; losses were recognized; and housing prices began radically adjusting downward.

So I have been trying to think if there are obviously similar cases to this, and one comes to mind: Higher education. Just like for housing in the 1990s and 2000s, government policies make it very favorable for loans and capital to flow into higher education. This results in rapidly spiraling prices (tuition, in this case), and radically increased debt levels for students. From 2001 to 2006, average tuition at public universities jumped 35% after adjustment for inflation, the largest five-year increase on record, according to the College Board, and double-digit increases have persisted since then. In effect, customers (students) are insulated from those price increases by the ready availability of student loans — just as homebuyers were insulated from fast-rising home prices by easy mortgage terms. As a result, the number of graduating college seniors with high levels of debt increased 1000% from 1993 to 2006.

Let’s see: Rapidly increasing prices? Check. Government policies to promote access? Check. Easy credit availability? Check. Huge increases in borrowings? Check. Tell me higher education doesn’t look exactly like housing.

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