Effects of the Student Loan Bubble

Student LoanAmericans owe $1.2 trillion in student loan debt, a number that has tripled in the last decade, according to a recent NY Daily news article. Student debt now exceeds the total of auto loans, credit cards, and home-equity debt balances, making student loans the second largest debt of U.S. households only following mortgage debt. Nearly 20 million Americans attend college each year; of those close to 12 million, or 60 percent, borrow annually to help cover costs. There are approximately 37 million student borrowers with outstanding student loans today, and only 37 percent of federal student loan borrowers (between 2004-2009) managed to make timely payments without becoming delinquent, as reported in the US Department of Education Almanac-of-Higher-Education.

Student loans provide critical access to schooling, given the challenge presented by increasing costs of higher education and rising returns to a degree. Nevertheless, some have questioned how taking on extensive debt early in life has affected young workers’ post-schooling economic activity. Is our system creating overwhelming burden for our young people?

The average debt load for the class of 2012 was $29,400, according to a report released by the Institute for College Access & Success Project on Student Debt 2012. At the same time that debt has been going up, colleges across the country have been hiking tuition and fees while families’ incomes have been shrinking. Student loan debt has risen at an average rate of 6 percent per year from 2008 to 2012, the report found. Seven in ten seniors graduated with student loan debt and a fifth of that debt was owed to private lenders, which often charge high interest rates.

To make matters worse, the job market still hasn’t recovered, leaving many graduates with little or no income. Still, the employment prospects of college grads are a lot better than those without college education. High school grads without college degrees faced an unemployment rate of 17.9% in 2012, compared to 7.7% for young college graduates. Despite discouraging headlines, a college degree remains the best route to finding a job in this tight market.

Institutions and the government continue to entice young people into the low-yield debt trap by “keeping debt affordable,” which in turn will lead to college tuitions rising even higher, forcing students to take out and default on even more loans, until this latest debt bubble can no longer be swept under the rug.  This is a financial disaster in the works, and the price of all the debt will eventually burst.

Student debt affects business start-ups

The burden of student debt may well cause people to make different decisions than they would otherwise—affecting not just individual lives but also the entire economy. For one thing, it appears that people with student loans are less likely to start businesses of their own. A new study has found that areas with higher relative growth in student debt show lower growth in the formation of small businesses.

Young student loan borrowers retreat from housing and auto markets

Student loan debt also appears to be affecting homeownership trends. According to research by the Federal Reserve Bank of New York, fewer 30-year-olds in general have bought homes since the recession.  Data released suggests that the relationship between student loan debt and the housing market has turned ugly fast. People with student debt used to buy homes at higher rates than peers who had not taken out loans, partly because going to college meant earning more money, according to the report. Among people around 30 years old, homeownership is plunging, even as the housing market has recovered.
For many people in college and recently out of it, the pressure of debt seems to be colliding in new ways and adding a layer of complication to something that was already plenty complicated, especially for student debtors.

Jeffery Masters, president of Jeffery W. Masters & Associates, can be reached at [email protected] Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a registered investment advisor. Independent Financial Partners and Jeffery W. Masters & Associates are separate entities from LPL Financial. Jeff is a Locally Endorsed Investment Advisor by Dave Ramsey, who is not affiliated with LPL Financial.

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