Bubble for student loans is very close to bursting
Posted April 27, 2011 at 9:41 pm in Opinion
It‚Äôs that wonderful time of year again. You‚Äôre weeks away from summer ‚ÄĒ 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.
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 ‚ÄĒ 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 ‚ÄĒ 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‚Äôs supply and demand; more Americans have been attending college in those years, boosted by scholarships and grant programs while college supply hasn‚Äôt kept up.
Rising costs at most major universities ‚ÄĒ coupled with a down economy ‚ÄĒ 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‚Äôs 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 ‚ÄĒ 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‚Äôs degree as compared to those with just a high school education. ¬†That payoff, the report concluded, was significant ‚ÄĒ 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 ‚Äúrate of return‚ÄĚ 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.