What is the Student Loan Bubble?

It seems like every month there is some new fiscal calamity bearing down on the American economy. We had the Fiscal Cliff, the Sequester, and now there are huge fears concerning what is being called the “student loan bubble.”

17% of student loan borrowers are late on repayment, photo by Philip Taylor PT

17% of student loan borrowers are late on repayment, photo by Philip Taylor PT

So the questios is… what is it? What is the student loan bubble, and how will affect me?

The name itself is a reference to the imfamous “housing bubble” which popped and lead to the financial crisis of 2008. The situation was caused by over inflated home values, and banks giving out mortgages to large numbers of people who could not afford them. In time, the problems built to a tipping point, and the financial fallout was felt not only in the housing market, but across every part of our ecnomy. Loans defaulted, people were exicted, home values plummetted… and five years later the market still hasn’t recovered.

Now to place that in context for the world of higher education – so far in 2013 banks reportedly have had to write off over three billion dollars in student loan debt. Let me repeat, that’s three billion (with a B) in as many months. This number is up thirty six percent from the same time last year.

And this is just a tiny fraction of the outstanding debt. American students owe upwards of one trillion dollars in student debt at the moment, and the number continues to grow every month. Why? Because since the job market is struggling and unemployment is high, a great many people are going back to school to finish their education or become educated in a new field.

There are forty million people with student loan payments. Seventeen percent of this number, just under seven million people, are delinquent with their repayments by at least ninty days. This enormous number of deliquencies is the most in years.

On average, college tuition has risen almost five percent per year for the last ten years. So while many more peoplke are returning to school, they are having to pay higher costs, and thusly take out larger student loanns than in the past.

So while more students than ever are defaulting on their loans, and more debt than ever is being written off, more and more of the loans are being issued in larger and larger amounts. The mind bogglingly huge numbers of people and money involved keep growing, and yet nothing about the system is changing.

This means that sooner or later something big will happen, and that is what all the conern is over the student loan bubble. The problem is that no one is sure what this “something” will be, or how hard it will hit the American economy.

One thing seems likely – as more students default on their debt, or simply lack the means or the income to pay it off, this debt will fall back to where it usually falls, on the American taxpayer.

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