Is a Student Loan Bubble Inflating?
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UPDATED: Nov 11, 2011
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Imagine our nation’s most recently graduated student. This proud, job-seeking, ready-to-take-on-anything individual is filled with hope, excitement and vigor. He imagines the future and sees nothing but the sky—for that’s the only limit that could possibly contain him.
So he begins his quest and tries to enter the job market. After creating a resume, and proofreading it over and over, he submits applications to all those wonderful employers he could picture himself working for. Each morning, the student curiously tilts his head as he finds his email inbox empty and the voicemail alert on his cell phone absent. As more time passes, his future outlook begins to slowly dwindle as discouragement fills its place due to the lack of responses he’s received from employers.
Then the realization sets in: I owe tens of thousands of dollars for this degree—and I’m unemployed.
This is an all-too-real trend that’s plaguing our nation’s freshly educated graduates.
It’s not uncommon for students to finish their four years of college and find they owe over $20,000 on their student loans—and that’s on the conservative side.
In fact, the National Student Loan Program recently stated the average undergraduate student carries $23,000 of debt today.
The U.S. Department of Education released statistics on the 2009 student loan cohort (those who obtained student loans between Oct. 1, 2008, and Sept. 30 2009) indicating that the default rate for those borrowers is 8.8 percent. That’s up from the 7 percent default rate the 2008 student loan cohort wields.
As explained by Arne Duncan, the U.S. Secretary of Education, “These hard economic times have made it even more difficult for student borrowers to repay their loans.”
That difficulty to repay is particularly relevant when considering just how much money is tied up in student loans.
According to the Federal Reserve Bank of New York, students took out a record-breaking $100 billion last year, and, for the first time ever, the total student loan debt will exceed $1 trillion by the end of this year, reports USA Today.
The amount of money tied up as debt in a portion of the population that is having difficulty finding a paycheck should ring a particularly ominous sound in our ears.
After all, the housing market sang the same tune, and the bubble was caused by the same thing: illiquidity. For many, the inability to turn real estate into money became a financial burden, wherein owners owed more for their property than their property was worth.
If students are taking out such extraordinary sums and are unable to find jobs (as evidenced by the rising default rate), then are degrees becoming financial burdens? If education begins to cost more than it’s financially worth, what will happen to the $1 trillion floating around in student loans today?
With the constant barrage of new measures aimed to counter students’ debt and our overall failing economy, let’s hope this inflating bubble is reduced to more healthy levels before our financial market suffers yet another critical implosion.