Bubble for student loans is very close to bursting


It’s that wonderful time of year again. You’re weeks away from summer — you can almost taste it. Whether you got the dream internship, you are lucky enough to be travelling abroad or plan to park yourself on a beach somewhere until classes resume again in August, summer is mercifully and tantalizingly beckoning you.

Julia Vann | Daily Trojan

Just like the Free Application for Federal Student Aid. With deadlines rapidly approaching for both federal student aid documents and USC supplemental forms, Trojans are completing financial aid documents before they ride off into the summer breeze. In fact, virtually all college students are — total outstanding student debt in the United States is fast approaching $1 trillion, surpassing aggregate credit card debt levels last year, according to The Wall Street Journal.

Yes, Americans now owe more on their college loans than they do on their credit cards.

Some economists have argued that this is a good sign. Maybe, they say, this means people are actually starting to gain control of their credit card debt.

But the real reason behind the skyrocketing rate of student debt is quite simple — and much more frightening. The price of a college education has risen roughly 450 percent since 1982, while household income has risen only 150 percent. It’s supply and demand; more Americans have been attending college in those years, boosted by scholarships and grant programs while college supply hasn’t kept up.

Rising costs at most major universities — coupled with a down economy — have forced students to seek out more private loans, as well. These loans are adjustable rate loans, which are notorious for their unpredictability.

Add the fact that unemployment for college graduates is the highest it’s been since 1970, according to USA Today, and students with those loans are facing slim prospects of repaying their debt in full and on time. For-profit entities focusing exclusively on loan origination, adjustable rate private loans and sputtering financial indicators — does this sound familiar?

It should. These are virtually the same warning signs that preceded the burst of the housing bubble, which in turn unleashed the financial crisis in late 2008.

If anything, the student loan bubble is scarier and potentially more fearsome. The cost of a college education has, since 1978, risen 600 basis points over inflation, according to n+1 Magazine. U.S. housing rose at only 50 basis points over the consumer price index during those same years. In other words, as high as housing prices climbed, and destructively fell, college tuition costs have climbed 12 times higher  during the same period of time.

Student loan default rates have, expectedly, started to rise. These loans would be the equivalent of subprime mortgages, especially because they are sold to major financial institutions. In short, the parallels between the housing bubble and the current vital signs for the student loan market look startlingly similar.

There are indicators to the contrary, however. The Economist has conducted research on the matter and concluded that, though unemployment among those with degrees is very high, a payoff still exists for those who obtain a bachelor’s degree as compared to those with just a high school education.  That payoff, the report concluded, was significant — averaging roughly $20,000 to $30,000 in increased salary per degree beyond a high school diploma.

Though economic cycles might diminish the short-term “rate of return” of a degree, the ultimate benefits of a college degree vastly outweigh the costs in the long-term.

Furthermore, though private loans have adjustable rates, private companies have taken greater pains to underwrite their risk than they did with mortgages in the 2000s.

The sooner hiring picks up, and graduates are able to repay loans, the faster concerns over a looming student debt bubble will dissipate. If hiring continues to stagnate, however, a frighteningly large bubble might be waiting to burst.

 

Teddy Minch is master of public policy student concentrating in civil infrastructure finance.

8 replies
  1. Ryan
    Ryan says:

    I love the old kanard ….. the average college graduate makes more in the long run than a high school graduate. That line of thinking enables the whole education industry, student loan industry and students to borrow borrow and borrow. I am in a graduate program and I noticed not one proffessor will touch on the issue of student loans. Even the proffesors are in on the biggest scame, as student loans are what fund thier salaries. They would never make an academic subject out of student loans and the rising cost of tuition. When I brought it up in class one day the topic was quickly changed. I wish this bubble would burst!

    • R U serious
      R U serious says:

      Your comments contain so many misspelled words and grammatical errors that I assumed you were just being facetious. And you are a grad student?!? You’re right. Stop wasting your money on school and get a job.

      • Pintsized
        Pintsized says:

        People who take the time to scrutinize over one’s grammar within internet comments are the ones in need of a job. Don’t you have something better to do with your time?

  2. JS
    JS says:

    Yes! I want to see more of this out and about. The next big bubble! We churn out more than 1.5 million “educated” people every year, we’ve lost some 7 million jobs near permanently since 2007, and the Gen Xers and Baby Boomers are not getting off or making room on the ladder whatsoever (they simply can’t afford to). Our youth unemployment is somewhere around 16% official, I think that’s only 25 year olds and below. Underemployment is higher, and important: can’t repay that $24,000 average on minimum wage and survive. Not without some parental assistance/drug dealing.

    Compare official and unofficial youth un- and underemployment to default rates in the coming months, long term un- and underemployment being the most important. Somewhere I’ve read that if 1% of all bank customers withdrew their funds nationwide, there would be a massive collapse. Banks are still stretched thin. Little matter, as the government does indeed finance a great deal of these loans. Will it print-bail itself out (again) should this bubble burst? Can I start using dollars for wallpaper yet?

    And, when the heck will the riots start? It only seems to take near 20% for parts of Europe to go. Too much damn X-box, that’s what. I want to see our lovely free-speech zones in use. The zones ensure your precious voice gets heard by those that are in power! Nevermind, obey and pay! Don’t worry that you can’t have a house, ever, and you will only be able to safely finance one child when you’re well into your late 30s. Raising kids sucks, right? Good thing?

  3. Edvisors
    Edvisors says:

    Lenders don’t make these loans anymore – the government does. The government can make more money from these loans as they have a lower cost of funds.

    The point of the article was that high college costs are driving increases in borrowing.

    Yes, loans are tough and require repayment, but they also help people get ahead. Yes, we can create a better program for students , let’s focus on that. Most of the defaults happen at lower quality schools where students did not get the education they needed – let’s look at that issue.

    It is easy to complain – let’s focus on solutions! Loans are not going away, let work on lower the cost of education and improving the quality. Job growth is obviously important as well – but it always is.

  4. Alan
    Alan says:

    The default rate on student loans has been higher than that of subprime home mortgages for years, but the public was never told, and still doesn’t know.More disturbing: both lenders and guarantors of these loans have a clear financial incentive for the loans to default, and this is by design. The bombshell story that was recently quashed by lending system “experts”: Even the Department of Education is making, not losing money on defaulted student loans, and has been for years. This last claim is controversial, but not if one only looks at the numbers.

    This is what is interesting and different about student loans. These are the facts that get to the root of the student loan crisis, and all of its warts (inflation, corruption, oversight, etc.), and underneath is all lie the removal of consumer protections, and collection powers that are unrivaled by any other debt instrument in this country. Not to mention a stunning opportunity for Congress and the president to demonstrate the ability to provide “better, not more government” in a non-partisan fashion.

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