Student Loans: Why the Bubble Will Eventually Burst

From the Great Depression to the subprime loan disaster, the U.S. has seen its fair share of economic crises.  And while markets have been quite resilient with each one, we could get walloped again with a $1.5 trillion student loan debt bubble. 

Granted, we heard about the student loan crisis before – without a burst.

But it may be coming sooner than we think.  Here’s the worst of the statistics:

1. Right now, the average college graduate carries $28,500 in debt with an average monthly payment of just under $400 a month. That’s up from $10,000 in the 1990s, says CNBC. 

2. More than eight million student loan borrowers are in default. 

3. The student loan balance for the U.S. is only forecast to hit $2 trillion by 2022.

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“There’s over 8 million people who are currently in default on their federal loans — it continues to be a large number, despite other improvements in the economy,” said Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, as quoted by CNBC. Worse, analysts also believe a large portion of that money may never be paid. 

And four, analysts believe that nearly 40% of borrowers could default on loans by 2023. That’s after the student loan default rate more than doubled between 2003 and 2011.

Thanks to the loans, say experts, Americans are not able to buy homes or cars, start businesses and families, save or invest, which could have significant repercussions for the U.S. economy and markets. In fact, according to Federal Reserve surveys:

“Young adults commonly report that their student loan debts are preventing them from buying a home,” Fed researchers Alvaro Mezza, Daniel Ringo, and Kamila Sommer said in a paper released Wednesday. “Our estimates suggest that increases in student loan debt are an important factor in explaining their lowered homeownership rates, but not the central cause of the decline.”

What makes all of this a bit worrying is how similar easy student loan credit is.

In fact, it’s eerily familiar to that of the subprime loan disaster. 

That’s because borrowing isn’t likely to slow any time soon, as the cost of education in the U.S. skyrockets. While state funding for colleges fell over the last decade, schools made up for that with higher tuition fees. That cost escalation in colleges is what could do us in. 

“Cost escalation, which would normally be met with consumer resistance, is being facilitated by the easy availability of credit,” says Barmak Nassirian, director of federal relations at the American Association of State College and Universities. “It’s disturbingly similar to what happened to tank the mortgage market.”

With the student loan bubble, it’s not a question of if it’ll burst – but when.

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