Student Loan Debt Is Absolutely Terrifying
Did you know that student loan debt can be the second largest expense made by an individual? Think about that…
If you’re curious, the largest expense made by most, is buying a house.
Here’s the deal:
A college degree promises students better-paying jobs, but in reality, many students can find themselves deep in debt. Student loans have jumped from $260 billion (2004) to a whopping $1.4 trillion (2016) and the trend just keeps going upwards!
Let’s examine the parallel between the past US mortgage bubble bust and the student loan bubble and see how it can be the next big bubble.
Why Is The Debt Increasing
The rapid expense hikes. Student debt has increased by a whopping 170% in just 12 years!
It seems obvious that can’t be all because a large number of students are applying to colleges, right?
Well, this also has a lot to do with how the availability of loans has led to the disequilibrium of demand and supply of money and the tough competition among colleges.
Let’s look closer…
With the ease of loan availability, and almost no collateral required (like what do college students have, their cell phones?), the supply of money became much larger.
What does this have to do with student loan debt?
Glad you asked: this means that more students could afford to go to college.
By the way, Americans age 60 and older are the fastest-growing age group of student loan debtors. A report by the Consumer Financial Protection Bureau shows Americans aged 60 and older with student loan debt grew fourfold over the past decade. The average amount owed is $23,500.
Since the number of students increased, so did the competition among universities and colleges. This meant that in order to attract more students, Universities began to pay top dollar for the best faculty as well as latest amenities.
This in turn hiked tuition fees, and they continually keep growing. There has been a 4% fee hike from 2016 to 2017 itself!
Sadly, an increase in tuition fees leads to increase in per capita student debt.
Trouble In Paradise
No doubt about it…
The biggest predictor of market trouble is rapid run-ups in debt.
Student debt currently is 140 trillion dollars. This is greater than both, debt in credit cards as well as car loans! Let that sink in.
The 2000s’ Housing debt bubble has merely shifted to student loan debt post-2008. Around 44 million students all over the US are in debt and 8 million of those are already in default.
This, added with the rapid fee hikes poses a big problem for the market.
It’s as if lenders didn’t learn their lesson from the recession of 2008!
Default and Lack Of Collateral: Is It A Good Idea?
As we’ve said, currently 8 million borrowers are in default. (Which means they haven’t paid their debt and are incurring interest on their student loan debt.
How did that happen?
In reality, college degree doesn’t really guarantee that you’ll get a well-paying job right away. And for about 25% of college graduates, salaries are on an equal scale with the high school diploma holders.
Simply stated… most students just can’t pay their debt right out of college.
And since there’s essentially no collateral, the bank can’t repossess your college degree!
That’s just part of the story…
For the longest time, private loan firms offered an instant approval and even online approval for up to 100% of college costs! And that too, for the entire 4 year period without co-signers!
Yes, this too is a scary thing.
Evaluating The Mortgage Bubble Bust: A Reality Check
There are a few things eerily similar to the mortgage debt bubble bust.
Let’s examine them, shall we?
- Approving loans to unqualified borrowers
Lenders had offered no-money-down loans to many unqualified high-risk borrowers which led to the crumbling of the market.
The same thing is essentially taking place right now! Private lenders are providing an instant online approval for student loans.
Meaning? Loans are easily accessible to the borrowers.
As mentioned before, it appears lenders aren’t too picky when it comes to giving out loans.
Collateral was the house itself in the case of mortgages, and they quickly realized repossessing that alone wasn’t sufficient to ‘payback’ the money owed (interest rates were too high).
Similarly, the collateral in case of student loans is the college degree which obviously can’t be repossessed to cover the costs!
High risk loans anyone??
- Loan default rate
Default rate means the number or percentage of people who can’t or haven’t been paying on their loans.
2% was the mortgage default rate in 2010, and you guessed it, in 2016 this exact figure was the student loan debt default rate.
Private lenders have fewer options for loan payment deferral and even incur additional fees and payments when you miss a payment. And according to a study done by College Board one-third of college graduates in 2007-08 had private loans.
This is beyond any reasonable doubt, something that can lead to the bursting of the student loan debt bubble in the foreseeable future.
In fact, some have said it could take a lifetime to pay off their student loan.
According to a report by the Government Accountability Office, in 2015 seventy thousand Americans age 50 and older had their Social Security benefits fall below the poverty line – or their benefits were already below, and cut further – because of defaults on student debt.
What Can Be Done?
A college degree is something that society has hyped up over the years. About 25% of college graduates have salaries equal to those who have a high school diploma.
- Mentorships: A tradition going on for centuries in which you ‘train’ under a professional to learn the job.
- Pell Grants: These are not as hard to obtain as one might think. Many high schools today are helping students to seek these grants.
- Affordability of Loans: Choose wisely. Only get loans that you’d be able to pay. A rule of thumb: the payment should never be more than your first year’s salary.
- Online colleges: This is another alternative, which sometimes proves to be a less expensive route to a degree.
- Vocational School: Many skilled trade positions are in demand, and have a higher rate of pay and better benefits than some degree’d positions
When thinking about that college degree, always keep in mind that student loans aren’t ‘good credit’ and can cause unforeseen hardships for you later in life. Plan wisely.