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Is education not worth what we spend?

Economics editor Chris Farrell

TEXT OF INTERVIEW

Bill Radke: Last week, The Education Department reported the student loan default rate rose last year from about 5 percent to almost 7 percent. Marketplace's Economics correspondent, Chris Farrell, says not only are students struggling to pay their loans, the money they're spending may not be worth it. Hi, good morning, Chris.

Chris Farrell: Well good morning.

Radke: Why do you think college today might not be paying off?

Farrell: Well think about it, Bill: what's the message that's been out there for the past several decades? The reason why you go get a college degree and you take on all that debt is because you get these great job opportunities -- and let's be really clear here, you get a good income. But if you look at the earnings of college graduates with a BA only since 2000, those real earnings, adjusted for inflation, are down. At the same time, the real debt burden from the loans that you've taken on in order to go to college are up.

Radke: But I'm trying to save money for my daughter's future education, and I see tuition keeps on rising. Why is that?

Farrell: You know, I think that we have been living through -- I'm going to use this term, and I'm not going to use it lightly -- an education bubble. Now, not everything that goes up in price or gets more costly is a bubble, I mean let's be really clear about that. But think about education. Why is the price going up? I know there's lots of reasons, but I'm going to give you the main one: the availability of student loans. Colleges and universities can raise their prices, we've made student loans more available and the bubble is going to burst. And the sad thing it's gonna sweep up a lot of young people.

Radke: So are you telling a lot of young people: shop on price, your degree might not be what you think?

Farrell: I am telling young people going to college use to be the equivalent of a hot growth stock. It's now the equivalent of an insurance policy. You still want that college degree, because you're gonna to be worse off without the college degree. But it's an insurance policy, so price really matters.

Radke: So who loses if this bubble pops?

Farrell: Well, I think there're two main losers. First are the student loan lenders. They're gonna have less business, they're gonna have higher default rates. And my own guess, and I'm just gonna put it out there, over time we're going to rely less and less on student loans to pay for college. The second group are colleges and universities. They've gotten fat and easy because they can always raise their price, and that's no longer going to work. They're going to face a lot of financial pressure. But you know what? They don't know yet how to deal with it.

Radke: Chris Farrell is our economics correspondent. Chris, thank you.

Farrell: Thanks a lot.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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