When The Student Loan Bubble Bursts

Fifteen years ago, people were quick to call student loan debt ‘good debt.’  Fast-forward to today and thousands of graduates with insurmountable student debt might not agree with your idea of ‘good’ debt.

Sure, we know that people with college degrees earn more than those who don’t have one.  Going to college and getting a degree isn’t the problem.  Borrowing a realistic amount of money to obtain a degree in a field that will bring a nice return on your educational investment isn’t the problem.   The problem is a combination of increasing tuition prices and poor management of student loans by college students.

Are Tuition Hikes To Blame?

According to Finaid.org, it’s normal to expect tuition rates to rise at a rate of two times that of the general inflation rate.  In this chart, you can see the trend of tuition from 1975 to 2005.

 

But take a look at this chart from project.org.  It shows the trend of tuition increases between public, private and community colleges.  See the problem?

Private school tuition is through the roof.  Even with a Pell grant and a couple small scholarships, a student attending a private university can expect to rack upwards of $40,000 or more after four years of college.  Apply that same Pell grant to public universities and it’s possible to finish school with less than $10,000 in student loans.

Using Student Loans as a Revolving Credit Line

The ease of obtaining a private student loan is mindboggling.  A student can simply go online, type ‘private student loan’, and start an application to receive tens of thousands of dollars to be used for anything they need (or want).  Need a car for school? Answer: private student loan.  Need to pay rent during school?  Answer: private student loan. 

Turning to student loans for every college expense is a recipe for disaster and it’s become the norm for college students.  Who needs credit cards when you have access to thousands of dollars that you don’t need to pay back right away?  Unfortunately, credit card debt is still a problem and when you combine it with student loans, you’ll find graduates who are unable to make the minimum payments on their debt.

When the Student Loan Bubble Bursts

Thousands of students are graduating from college with student loan payments of $300 to $700 or more a month – which will last for 10 years. With such high loan payments, graduates may be likely to put off the purchase of big ticket items such as a new home or new car.  Waiting until your debts are paid before you add more to your plate would be the smart thing, right?  Sure it would, but hearing things like it’s such a good time to buy a home and we really need another car makes it seem like adding more debt is the normal thing to do.

The reality is that graduates cannot default on student loans.  If the student loan payments are too hard to manage and the car payment, house payment and credit card bill force you to go bankrupt – you still have that looming student loan to pay afterwards.

The student loan bubble could really hurt the economy, especially if graduates are diving into mortgages they can’t afford only to be foreclosed on later because their long-term student loan payments are overwhelming.

What advice do you have for students entering college or for those who graduate with debt? 

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  • michelle

    Advice: Stop! Re-evaluate often! There is no disgrace in graduating college at 25 if you have to take a year off to earn some money for the next semester, etc. I often wondered who’s great idea it was for it to seem “normal” for a 21-22 year old to be saddled with that debt. There is no guarantee that they will find a position in their chosen field (unless it’s medical it seems). But people are biting off way more than they can chew. Another alternative is for parents to start a pre-paid tuition plan. In my son’s senior year, he got a letter saying that his first 2 years were paid in full because we started this fund through the state when he was 5 years old. So it looks like we’ll have a whole generation stressed and over-extended when it should be the most carefree time of their lives! Sad.

    • http://www.patheos.com/blogs/faithandfinance Tim

      Good point Michelle! It’s crazy to think how college students justify going into debt – I know because I was one of them! Whatever you think your disposable income will be after you get a job…cut it in half. I’m worried that our generation will be so focused on paying down 20,30,40k of college debt that they’ll neglect saving for retirement.

  • http://www.chase-a-dream.com Karunesh @ chase-a-dream

    Tim, you have raised a very serious issue. Students loan should be provided for the important most needs – that is tuition fees, hostel fees etc. The problem is that private loans are so easily available and it may lead to another bubble.

  • http://www.thadthoughts.com Thad P

    All bubbles burst. This one will too, and it will not be pretty. But even if it doesn’t it is not pretty. Pam from MoneyTrail called student debt “gateway debt”. She’s right about that.

  • http://www.budgetforhealth.com Jessica @ Budget For Health

    I came out of college with $30,000 in student loans and we paid it off in 9 months after my husband and I started our new jobs! The key to knocking it out so fast was that we kept living like broke college students- we kept sharing one car, we didn’t buy anything new, got the minimum plan for our phones, and never ate out. It was better for us to knock out the loans before we let ourselves be tempted by what we could be buying with a double income. It took some discipline, but we are so happy to have that debt gone!

    • http://www.patheos.com/blogs/faithandfinance Tim

      That’s incredible Jessica! It just goes to show that anything is possible if you’re committed to paying it down.

  • http://evolvingPF.com/ Emily @ evolvingPF

    For those entering college: 1) If you have any inclination that you are going to major in a less-marketable field, go to a public university in your home state. 2) Work at least a few hours a week during school and full-time during the summer to defray some of the cost of living as you go along to avoid taking on more debt. 3) Pursue summer and part-time jobs that will advance your career or career exploration process so that you have some work experience and contacts before graduation. (I would encourage this even over taking a job that pays more but is not in your career scope.) 4) Live like you don’t make any money because you DON’T. If you are paying for room and board on campus you probably already have a very high standard of living in terms of the amenities available to you, so you do not need to blow lots of additional pocket money on food and entertainment off-campus or on vacations.

    For those exiting college with debt: As Jessica said, the most important thing is to keep your standard of living low and not take on more debt. Don’t buy a new car, don’t finance furniture, and don’t take on as much rent/mortgage as people tell you you can afford, and keep your discretionary spending low. Just buckle down and pay off the debt fast and then you can consciously raise your standard of living in the areas that matter to you.

    • http://www.patheos.com/blogs/faithandfinance Tim

      Hi Emily,

      Thanks for your suggestions! I wish I would have applied more of my summer job income towards my tuition. Every little bit would have helped to lower the debt that we ended up with after college.

  • http://blog.moneytrail.net Pam at MoneyTrail

    We are in the process of deciding on a college for our oldest child. I think you absolutely have to weigh the tuition cost into the decision about where to attend. She was accepted into one private university at an estimated cost of $61,000 per year. The public universities that she was accepted into have an average of about $21,000 per year. Even with a financial aid package, the private university is significantly more.

    • http://www.patheos.com/blogs/faithandfinance Tim

      If she attends the private university, I hope she only has to borrow a max of $10,000 a year. Anything more can really REALLY be a burden. I hope she get’s a lot of scholarships either way! :)

  • Indentured Servant

    I graduated with a modest amount of debt but ended up with a low wage dead end job. Now I live on poverty level income and pay $150 a month on student loans.

    • The Future

      Not for long, at this rate the bubble will burst in the next year or two, American’s cannot absorb this debt, wages are too low for the masses of students coming out of colleges to be able to pay these debts they owe. When you have lawyers and engineers applying at companies for starting salaries something is wrong and given historical reference we’re not going to put anyone into a position where they do something to fix it until it explodes. Procrastination wins out over the Pro-active 9 times out of 10.

  • http://speedyloansearch.com/ speedy loans

    I was wondering, did Wall Street do the same thing with student loans over the last 10 years or so as they did with the mortgages? I mean, did they lump them together, tranche em, sell em, sell CDSs on em, sell CDSs on the CDSs, use the leverage to trade in further derivatives of derivatives, etc.? Is there an entire menu of student-debt-backed securities? If they did it with gov’t backed mortgages, I can’t imagine why they wouldn’t do the same to student loans.