When The Student Loan Bubble Bursts

When The Student Loan Bubble Bursts April 4, 2012

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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