The Student Loan Bubble is About to Pop

Brent Pittman —  03/15/2012

Another Bubble?

Surprise Mr. Economy! There is a another bubble out there ready to pop. The higher education student loan system is a bubble waiting to burst.

This bubble if not addressed could harm the economy along with thousands of households.

Causes for the Student Loan Bubble

This is a complex issue and when it pops and the dust settles, more causes will come to light. Here are a few that we can see now:

  • Rising Education Costs- Education costs rise year over year and student loan debt is inching towards $120 billion according to The Economist.
  • Government Loan Subsidizes Education The U.S. government has been artificially keeping the interest rates lower, but they are soon to return to 6.8% this summer.
  • Young (fiscally) Uneducated Students taking out loans. If someone offers you money when you are 18 you’ll say “yes”, without understanding the future economic implications.
  • Parents taking on college loans or cosigning for their children out of guilt or a sense of responsibility, without means to repay or robbing from their retirement.
  • Bankruptcy Protection- Federally backed student loans are to be paid back systematically until paid in full or until death.
  • Belief that college is a right and not a privilege. There seems to be a growing belief that society should pay for everyone to have a college degree. The Student Loan Forgiveness Act of 2012 (H.R. 4170) seems to go along with this line of thought.
  • Students attending college with no clear plan or future employment in sight. College isn’t for everyone, nor is it needed for every profession. The college major you choose will have major direct implications on your first career.

You can avoid the student loan bubble with a little planning and hard work and perhaps your children will take an alternative to college.

Can a Bubble be Deflated Instead of Popping?

We all recognize that the higher education system (along with the primary and secondary systems) in the U.S. aren’t perfect and need improving.

Can an economic bubble like the student loan bubble be deflated instead of popping? Possibly, but it seems the answer is for the individual to take on more responsibility.

With the housing crisis of 2008, a major result was an increase in dollar amount of down payments. Putting 20% down is now the new normal with the individual taking on more risk and the banks taking less.

The student loan bubble could turn into the student loan crisis if both individual families and educational institutions don’t start acting fast.

True, the government can ease some pressure, but ultimately it is the individual who decides to take on the responsibility of debt in the form of a student loan.

What are your thoughts about the Student Loan “Bubble”? How does it affect you? 

Photo Credit Juha Riissanen (Creative Commons)

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Brent Pittman

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Brent is a financial coach and writer looking for the perfect donut. He believes personal finance should be both fun and accessible to anyone willing to learn.
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  • Thomas Jensen

    Thanks for bringing this issue to our attention. I agree that individual responsibility (or lack there of) is PART of the problem. The real issue is the absurd inflation in education tuition costs – which has been almost twice the overall inflation for years. When an educational system is run as a private business, with no or low competition, you’ll see the price go as high as possible while maintaining a decent demand (equilibrium). Problem is, it is increasingly difficult for middle-income folks to pay this price – thus the extensive borrowing. Conclusion: a huge debt bubble waiting to pop and higher education becoming a priviledge of only the wealthiest of us.

    • Thomas, year over year double digit increases in education are absurd. I guess they believe demand is high, so charge a high prices. Basic economics. What they are failing to realize is that they are locking many students out the market. With increasingly new opportunities for self-learning the higher education system will be forced to change or die.  

  • Sure, any has a “right” to have  a four-year degree in recreation sports.

    • Funny! I wonder what college will look like in 25 years? 

  • BRSimpleBiz

    All bubbles “POP”!  Name one that was ever successfully “deflated”.  We have neither the foresight nor the will to make the tough choices to bring this under control.  Once again personal responsibility will be out the window and our financially broke government will be expected to do another bail out.  Sad to see the demise of an awesome system.

    • I can only hope for deflation, this one I think will be a long slow ‘letting the air out of the bag’ type of pop due to bankruptcy laws. 

  • Jackie Walters

    Brent, I do not support this act.  I truly believe there is a better way.  We need to address the root cause of this student loan bubble.  Ignorance on the student and parents part not to mention the financial aid officers.   I too believe the gov’t can ease some of the pressure in the short term but it is the individual that needs to take the responsibility of the debt in the first place.

    • Jackie, I don’t think HR 4170 is the answer either. I can only applaud someone (though misguided) for trying something.