May 17th, 2012

Is the Student Loan Debt Bubble Ready to Burst?

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student loan debt

**Today’s guest post is contributed by Harry Campbell.**

This spring, more than 1 million new graduates will be thrust into the work force. And according to a recently published Rutger’s study, more may come out of school with debt than come out with jobs. Today’s graduates face the perfect storm of a weak job market combined with an overly saturated applicant pool. There was a time when a college degree held significant value and graduates would be inundated with job offers. That time has passed, and now there looms a bigger problem.

We all know the cost of college is skyrocketing. Public and even private schools have increased their tuitions at a pace that severely eclipses inflation. Since 1981, the price of tuition at US colleges has increased 6.4% annually, more than double that of inflation. These unsustainable tuitions are afforded, in large part, by student loans. Student loan debt has now grown to over $1 trillion, surpassing even credit card and auto debt. Universities are responding to budget cuts by increasing tuition and students are taking out more and more debt in order to finance this whole operation.

Signs of a Bubble

During the housing bubble, cheap money was made available to people who had no business owning properties. Banks were even making up investment options like interest only mortgages to entice borrowers. Eventually the market could not support rising house prices and the housing bubble burst. Similarly, the price of college will continue to rise until the market revolts. But unfortunately for students, student loan debt cannot be discharged in bankruptcy court and social security payments can even be garnished to pay off student debt.

Currently, there is almost no underwriting on student loans. 17-year-old high school students and their parents are being allowed over and over to determine what level of financial burden they can take on. So far, students have seemed willing to shoulder tremendous amounts of debt in order to pursue the college of their dreams. In fact, 1 in 5 students from the Rutger’s survey actually deferred their student loans by going to graduate school and taking on more debt! The point of all this is that getting a student loan has become too easy.

A Presidential Debate

Mitt Romney and President Obama have recently come to the defense of student loans, asking congress to maintain the current low rate of 3.4% on new Stafford loans for another year. With so many young professionals struggling to pay off debt, this seems like a no brainer, right?

However, we need more than a 1 year or temporary fix. Government budgets are cutting more and more from public education, and in response, universities are raising their tuitions and in turn raising student debt. Given the current job market, many students from the Rutgers survey indicate they would actually choose a different major if they could do it all over again. Nearly half of them were actually working at jobs that didn’t even require a college degree.

Is College for Everyone?

I think too much emphasis is being placed on going to college these days. I don’t think it’s a good investment to go into $100,000 of debt to get a humanities or fine arts degree from a mid-level university. From a financial stand point, this is a bad investment. Unfortunately, the government is making lots of bad investments with student loans.

The government needs to focus their efforts on awareness. As the study above showed, upon entering a stale job market, many students wish they could go back and change majors. Does a 3.4% or 6.8% interest rate really make much of a difference when you’re working a minimum wage job and saddled with $100,000 of debt? My solution is to force colleges to show true rates of employment and pay by major right next to yearly tuition. I think a lot of students would make different choices given this information.

The real question here isn’t whether the student loan debt bubble will pop, but when? Prospective parents of college students should not ignore common sense in obtaining a degree. People used to say you can’t put a price on education, but that axiom no longer holds true. The cost of college is becoming more and more ludicrous and student loans are only allowing the madness to continue.

Discussion Questions: Do you think student loan debt is a problem? Should student loans be looked at more like an investment or do you think our current setup is acceptable?

is the founder of Your Personal Finance Pro; he lives and works as an Aerospace Engineer in San Diego, CA. Harry started his blog in January of 2012 and writes about real estate and personal financial advice for young professionals.

Opinions expressed are solely those of the author and do not necessarily reflect the opinions of CreditKarma.com or its founders.

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15 Comments

  1. I am a 25 year old, white male who grew up in southern NJ. I went to Rutgers for 4 years and obtained a Criminal Justice degree. My parents had insilled in me that getting education was sooo important in getting a good job, but a college degree wasn’t enough, apparently. So I moved to California to try law school for a year. After that didn’t work out, I got my MBA degree while working full time. During all this time, my loans kept being deferred. Now, I owe over $120,000 in school loans, and my monthly payments aren’t making any dents…

    Mike Casey at 9:49 am on May 17, 2012
  2. I definitely would have chosen a different major…and a different Masters degree…it’s sad we can’t go to college to learn what we are interested in and turn that into a job that actually pays.

    Linzay @ brokerunner.com at 12:51 pm on May 17, 2012
  3. @Mike..I think it’s so tough for grads like you who have been pushed so hard to go to school and more school and now it’s not paying off but keep your head up and you’ll be able to slowly start chipping away.

    @Linzay..Yea it’s kind of sad, but true. Most high school seniors don’t realize this, and I don’t really blame them for that. I think the gov. needs to intervene a little more with something like what I mentioned above in posting avg. salaries by major.

    Harry @ yourPFPro at 6:27 pm on May 17, 2012
  4. I think it is wonderful that CK is addressing this important issue. Student loan debt can be a very serious matter, especially when grads don’t make as much money as they hoped to make after graduation. Sometimes they can’t even finish college and are left without a degree and unaffordable loan payments! Students should take advantage of any grants, scholarships, or employer-sponsored programs that they may qualify for, rather than rely solely on student loans. Also, if you can stomach it, go to a community/junior college and then transfer to a 4-year college or university. It’s precisely what I did and I saved $40K. My (now deferred b/c of grad school which I have been attending for free) $125 monthly loan payment is much more manageable than the $900 loan payments I’ve read about lately.

    Christine S. at 12:30 pm on May 19, 2012
  5. What i always advice students to do is go for scholarship and other financial aid institutions instead of going for loans.Most times this students are not aware of some of the bottle necks surrounding loans that will only come up after graduation

    Kevin@financial aid at 11:26 pm on July 17, 2012
  6. I dropped out of college to get my first job (no previous full-time experience) for $40k/year. I’ve never looked back since.

    I think most college is a waste of time and a drag on the economy.

    David Jaeger at 12:08 pm on September 2, 2012
  7. The bubble just burst…

    http://www.zerohedge.com/news/2012-09-28/next-subprime-crisis-here-over-120-billion-federal-student-loans-default

    21% default rate on over a trillion dollars, exactly what the sub prime looked like. Get ready for 2008, but with an extra 6 trillion(Thanks Obama)of debt and no means to stop the fall this time.

    Mick at 11:50 pm on September 28, 2012
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