This Is How the Student Loan Bubble Is Primed to Pop, From a Student Funding Expert

Fueled by easy money, inflated tuition and high default rates, the student loan bubble mirrors the 2008 subprime mortgage crisis. We could be headed for a potential financial collapse. What can we do?

By Daniel Rubin

published 4 September 2025

in Features

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(Image credit: Getty Images)

In 2008, the U.S. economy nearly collapsed under the weight of subprime mortgages — a crisis built on easy credit, government guarantees, a near-religious confidence in ever-rising home prices and a reckless belief that everyone should and could own a home, regardless of their ability to pay.

We learned, painfully, that good intentions can mutate into monsters, and the result was a decade-long financial and social catastrophe.

Fast-forward to 2025, and we're watching an eerily similar pattern repeat itself. This time, the toxic asset isn't a house — it's a college degree.

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An unfolding crisis

Since 1980, college tuition has surged nearly 1,300%, according to Bureau of Labor Statistics data. That's not inflation — that's a crisis. The culprit? The same toxic ingredient that fueled the last financial disaster: easy money.

Just as banks handed out mortgages to virtually anyone with a pulse (remember NINJA loans? No Income, No Job, No Assets), the federal government handed out student loans with virtually no underwriting, no assessment of ability to repay and no accountability from schools that benefit regardless of student outcomes.

The parallels to the mortgage crisis are striking: Inflated demand fueled by easy money led to prices far beyond fundamentals until the whole thing collapsed like a house of cards. The same is happening now in higher education.

Students are encouraged to borrow tens or even hundreds of thousands of dollars without understanding the financial consequences.

But here's the truth — a $250,000 degree in sociology from a midtier university is not an asset — it's a subprime loan in disguise. The borrower might be sincere, the intent might be noble — everyone deserves a college education — but the economics are broken.

We've created an education bubble based on subprime degrees and have flooded the system with artificial purchasing power while expecting no consequences.

Student loan defaults have begun

According to the U.S. Department of Education, more than 5 million borrowers have defaulted on their federal student loans, and that number could rise to 10 million by year's end.

That would put one in four borrowers in default, a level that should terrify policymakers and taxpayers alike. When the government finally stops deferring reality, it'll resort to wage garnishment, seized tax refunds and even stripped retirement benefits from defaulted borrowers.

Policymakers are finally waking up to the crisis. A new law, effective in July 2026, the One Big Beautiful Bill Act, will cap lifetime federal borrowing at $257,500, eliminate the Grad PLUS loan program and impose limits on Parent PLUS loans.

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These are steps in the right direction, but they're too little, too late. The student loan pipeline has already created $1.8 trillion of student debt with little connection to labor market outcomes, per the Education Data Initiative.

The new Repayment Assistance Plan (RAP), while more income-driven, still stretches forgiveness to 30 years and offers limited relief in the face of stagnant wages and inflated tuition.

Who are the most affected?

The tragedy is that just as with subprime mortgages, the most vulnerable will suffer. First-generation students, minorities and low-income families who were lured into debt traps under the illusion of upward mobility could graduate (if at all) into stagnant wages and a mountain of unpayable loans.

The architects of this mess — universities, policymakers and bureaucrats — face no consequences. In addition, government accounting shows federal loans are costly. The Congressional Budget Office projects a 19-cent loss for every $1 lent under federal student loan programs. That's basically a subsidized insolvency.

The housing crisis ended with foreclosures, lost homes, broken families and a decimated middle class. Are we going to wait until the student loan bubble bursts with the same force?

The only path forward is to turn off the faucet. End the era of government-backed lending, and let private markets bring discipline back into the system.

Private lenders operate on one simple principle: Lending should be based on repayment capacity. They underwrite loans based on the value of the degree, the historical outcomes of the institution and the borrower's likely earnings. Lending is done with care.

What we can do

In a world where real capital is on the line, not all degrees get funded. In the private market, money has memory, and prices — whether of homes or tuition — are grounded in economic reality, not fantasy. That's not elitist; that's rational.

Let students evaluate a college degree by asking a simple question: "Is this worth the cost?"
Let schools be held accountable for the return on investment (ROI) of their degrees.
Let policymakers provide legal clarity for income-contingent private loans.
Let's stop pretending that unlimited government debt is a substitute for sustainable opportunity.

We've seen what happens when we ignore the warning signs. If we don't act now, the next financial collapse won't come from Wall Street, it'll come from college campuses.

However, we have a fighting chance to act before America's next debt bomb explodes. Let's not waste it.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Dan Rubin is the founder and CEO of YELO Funding, a socially driven education fintech company on a mission to improve access to education by offering income-contingent financing to U.S. college students of all backgrounds. Mr. Rubin has 27 years of principal investing, investment banking, restructuring and operational experience, including roles as co-founding partner of YAD Capital, a private credit investment firm, private equity real estate investor at Halpern Real Estate Ventures and JEN Partners, investment banker at Lehman Brothers and turnaround consultant at Deloitte.