The Student Loan Bubble

Monday, July 9, 2012

The Student Loan Bubble

S&P,, Moody’s, Fitch, and Bloomberg all seem to agree: student loans may be the next U.S. asset bubble, and it may just be waiting to burst.  There’s no surprise that this could be devastating for the economy.  

Since the 80s, the cost of attending college has risen by over 400%, while the average family income has risen by less than 150%.  According to the Federal Reserve Bank of New York, student loan debt totaled some $867 billion at the end of 2011 (which surpasses even credit card debt and auto loan debt) and is estimated to have surpassed $1 trillion already. This debt is growing by an estimated $40 or $50 billion a month and two thirds of that debt is owed by people under the age of 30.  Furthermore, Fitch shows that a good portion of that, perhaps as much as $250 billion, is non-current loan debt, at least 30 days past due.  

All of these indicators have created the general consensus that the student-lending market is a bubble, and that it may get us in as big of a mess as the housing problems that arose prior to 2008.   Whether this is likely is still mostly speculation, but it does give cause for worry.

Part of the problem seems to be that students use loans for every college expense, and sometimes to buy things that aren’t even necessary or relevant at all.  The general mentality seems to be that if they don’t have to pay it now, they may as well take the money.  They don’t see credit cards are necessary, or that they should consider actually saving up money for college.  Since they have thousands of dollars at their disposal, which they don’t have to pay back right away, they use that to justify any expenses they wish to incur.  

The second issue is that graduating students, who have debt and loan payments of anywhere from $10,000 on up and wind up paying more than $300 a month in many cases, will be paying back loans for years with no guarantee of substantial income.  

It’s troubling that over half of the graduating college students are unemployed or underemployed.  College students are finding themselves less equipped to pay back their loans because of their inability to get jobs that would give them the opportunity to make realistic payments. And with 70% or more of college students graduating with debt, the lack of good jobs available becomes an issue.  Borrowers and lenders both may have pretty unrealistic expectations of what the borrowers will actually earn in the future, meaning that they will not be able to pay back the loans nearly as well as anyone hoped.

Parents in general seem not to expect their children to become fully independent as quickly as they used to, creating less incentive (or ability) to pay back loans.  In fact, borrowing huge amount of debt may actually set back students worse than if they’d never gone to college at all.  And, while you can usually get rid of a troublesome house loan by selling the house, you can’t sell your student debt.  When you take the loans, you are responsible to pay them back fully.

However, there is an opinion that if the student loan bubble bursts, it will not create a widespread economic crisis.  Experts seem to think that the biggest effect will be on the borrowers themselves.  Though the general economy will not suffer greatly, the younger generation will have limited spending power, and this may cause limited economic and societal growth for years.


This article was written by Jennifer Carrigan for a website that explains about an alternative loan to payday loans.

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