A Student Loan Bubble Bust Approaching?
Anybody who attends college, has attended college, or is planning on attending college is familiar with financial aid, particularly how big a pain in the ass it is. The financial aid office is much like a plasma clinic: People wait in long lines filled with other desperate faces only to willingly have the staffers inside completely drain them emotionally and physically. Afterward, the people leave exhausted and (hopefully) with a check that they promise to spend wisely when in reality beer is probably on their minds. But, unlike the plasma clinic, the financial aid office may be inadvertently creating another huge economic problem.
There’s another financial disaster brewing and no, it isn’t a new M. Night Shyamalan movie.
According to a recent report by Moody’s Analytics, one of those all knowing credit rating agencies, the next bubble to pop is likely the very thing responsible for educating millions, the student loan bubble. We all know what happens when bubbles pop: things get sticky for a while. So what the hell is Moody’s talking about?
Prior to 2008, it was easy to justify an average of $24,000 in student loan debt because that little diploma promised a life of prosperity, even for the dumbest of students. Students were expected to go to school, graduate and find a job within weeks. It was the quickest and most reliable path towards the middle class.
But things changed when the housing market took a giant toxic shit on everything. America and her industries responded by tightening belts. Companies downsized, consumers payed off banks’ debts, and the homeless were sleeping in smaller and smaller boxes. If the financial crisis of 2008 taught us anything it was to be cautious when giving loans.
Unfortunately, when lenders cut back funding for small businesses, corporations and consumers they accelerated lending to students, which is causing the bubble that Moody’s is concerned about.
Moody’s report cites Consumer Price Index data which concludes that the cost of tuition and fees has more than doubled in the last ten years. Rising tuition coupled with a huge influx of new students —due to high unemployment and a heightened sense of competition — created an environment where banks were literally giving anybody with a heartbeat student loans. It’s like an old man “investing” in a massage and just hoping for a happy ending.
Not only were banks lending, they were lending with high interest rates. Federal Stafford loans have a 6.8 percent interest rate, some private bank loans have interest rates as high as 13 percent.
Yet banks were convinced that student loans were a sure thing. As long as students graduated with a degree and started making money the loans were a guaranteed cash cow. But the economy is remaining sluggish even longer than the banks expected.
For instance, the unemployment rate among 18-25 year olds is higher than the national average at 14.6 percent. Sure, young college graduates face lower unemployment at around nine percent nationally, but the figures ignore those who are underemployed. What’s more is only half the jobs landed by recent grads require a degree.
There is a reason this current generation of graduates is called “the boomerang generation,” many recent grads have to return home to live with parents while the job market is slow. Millions of young people with college degrees are wasting time in their parents’ basement as you read this. What’s more worrisome, however, is the volume of students graduating with debt.
According to ProjectOnStudentDebt.org, 66 percent of graduating seniors in Ohio during 2009, have some kind of student loan debt. The average debt of a graduating senior was $25,842. The numbers since then have only increased.
High unemployment and low wages among college graduates is leaving many students no choice but to skip student loan payments in favor of putting food on the table.
According to Moody’s report, 11 percent of student loan payments are 90 days or more past due. The Federal Reserve Bank of New York reported that outstanding student loan debt has increased 25 percent since 2008, to a total of $550 billion.
Unfortunately what most students and parents don’t realize is they are willingly participating in a practice that may one day wreak havoc on the economy. Understanding every financial aid option is important. Utilize federal loans and grants before signing away your life to a bank or private loan.
When guidance counselors, parents and life coaches say, “Go to college, stupid!” students around the country should give those idealistic pricks this article.
If banks, lenders, schools and administrators keep upping the costs of a degree, let’s all do the country a favor and not better ourselves through education, let’s workout and tan instead.
