What exactly is the student loan bubble, why could it bursting be the worst economic crisis in the last few decades at least, and when would it happen? Or is it really just an overhyped concept by the media?
From Wikipedia:
In the UK, students do not have to repay their loans (via income tax) until their income exceeds 21000GBP. They then have 9% of anything over that deducted. The debt is cancelled after 30 years, even if nothing has been repaid.
It’s a classic scenario - the government makes tuition money easy to get, so almost anyone can get a loan for whatever the tuition costs. The universities see this river of money and decide to dip their buckets deeper, hiking tuition.
(I believe there was a thread here a few months ago where someone was asking about a performing arts college on the upper east side of NYC where tuition was $20,000 a year. Seriously? AFAIK, tuition in Canada for a real university is about $5,000 to $7,000 a year. And… we haven’t even mentioned living expenses in those numbers.)
Meanwhile, congress has decided that it should be almost impossible to ditch the debt due to bankruptcy. As one lawyer said about the process - it only is cancelled if there’s no chance, but there’s always a chance someone could win the lottery.
So the best and brightest in America start life with a small mortgage already strapped to their back, tens to hundred thousand or more. As mentioned above, the pay resulting form that education is not keeping up with the relative cost. This reduces the future economy - these students won’t be able to buy cars, buy houses, spend disposable income. As their numbers grow, what is the risk that a major recession means that hundreds of thousands become unemployed with no way to pay that debt back. I haven’t seen any statistics on what percent of some banks’ loans are student debt, but that’s got to be a worry for some banks… It’s not like there’s property to foreclose on.
md2000 mentioned that it’s almost impossible to get out of student debts, even by bankruptcy. As this problem mushrooms, and student debt becomes increasingly burdensome, it’s very likely that we’ll eventually reach a “tipping point” where the laws regarding student debt will have to be changed, and getting out from under your debt will be easier. I’m sure that more than a few people in the student loan industry stay awake at night worrying about the wave of defaults that would occur under such a scenario.
There are a lot of myths about the student loan bubble, but for some reason people really want to believe them. In reality less than 5% of all student loan borrowers borrow more than $100,000. Average debt for bachelors degree grads is under $20,000 - not insignificant but also less than you’d borrow to buy a decent car. Certainly not a mortgage.
Total national student loan debt has increased dramatically, but it’s primarily because more students are attending college than in the past.
Overall, a college degree is still one of the best investments most college grads can make.
Diceman and md2000 make valid points – tuition inflation in the US is a real phenomenon with lifelong consequences on the graduates in terms of reduced net take-home income or forced limitations on career choices. Even so, the risk of a student loan bubble is overblown in light of the recent changes to the repayment plans. Almost all borrowers quality for the the Federal income-based repayment (IBR) plan, which limits monthly repayment amounts to no more than 15% (10% for new borrowers as of July 1, 2014) of a borrower’s discretionary income, defined as the amount of the borrower’s adjusted gross income exceeding 150% of the poverty line (or $1458.75 in 2014) and which never exceed the monthly amounts the borrower would have paid under the stadard 10-year repayment plan. Moreover, all debt is forgiven after 25 years of repayment (20 years for new borrowers as of July 1, 2014).
Repayment plans don’t address the problems of tuition inflation or lessen the impact of student loans (I pay over $1,000 monthly on student loans and have done so the past several years), but it’s manageable and unlikely to lead to the type of bubble we witnessed with the real estate market in 2007-08.
Yeah - I don’t think there is a financial bubble like the housing market because the loans have guarantees that just didn’t exist in the housing market. The problem here isn’t one of default risk but one of devaluation.
College degrees have become more costly because of the availability of guaranteed loans, but on the other end the prestige and worth associated with those degrees have gone down.
A big thing I see changing it in the future are more community colleges and more respect for community colleges. An issue I took with and liberal arts degree is that there are so many students involved that are participating out of begrudging necessity that it spoils the academic environment. With less people studying poetry for a credit, for example, the remaining students will be there for true enjoyment of poetry and elevate the quality of the experience.
Imagine this happening in the technical colleges - I don’t want to be a proficient woodworker, I’m just here to get my technical credits. Devalues the point.
If like to point out that there are seven different repayment methods, and new federal loan repayments can be paid at 10% of one’s disposable income. Loans replayed on these terms are forgiven after 25 years, or 10 years for those in public service positions. Deferrals are regularly granted for those with financial hardship. Mine were deferred for four years while I was in Peace Corps.
Unless you can’t figure out the paperwork for the repayment plan, there is no reason why new federal student loans being currently issued should have major impact on a persons life.
Oops, someone already got to this point.
But then… basically they have used their parents’ savings to pay for their tuition - still sucking disposable income out of the economy, and also reducing the retirement savings of the parents. It seems essentially student loans are a 10% tax on the educated.
Yes, based on that limitation of payment amounts, there is no chance it will be a market crash phenomenon like the housing/fraudulent mortgage crash, instead it will be a steady and persistent drain on the economic livelihood of the middle class.
I don’t get it. Tuition in Canada is about one quarter to one third that of the USA; health care is free (my income tax federal and provincial totals a little over 25% of a $70,000 income). Compare this to the average income earner in the USA, too rich for Medicare paying monthly hundreds to a thousand for family health coverage and hundred for student loans. That’s got to be subtracted from possible other uses for disposable income that could boost the economy.
Americans don’t understand socialism as in ‘in order to… promote the general welfare’, and Socialism as in 'The government wants to steal your guns and kill God and turn us into North Korea! :eek: ’ To us, it’s all the latter.
Moderator Note
Let’s keep the political commentary out of GQ. No warning issued, but let’s not get off track.
Colibri
General Questions Moderator
No, none of that is true. The reality is that the actual cost of attending college is diverging further and further away from the published “sticker price” of the college.
In other words, Harvard’s astoundingly high $44,000 per year tuition is paid by virtually nobody, except the children of the exceptionally wealthy. The same is true of less prestigious private colleges and state schools.
And just to be clear, if students were paying the “sticker price” by taking out loans that would totally count as “paying” it. The point is they almost nobody does that.
Considering grant aid from all sources and federal tax credits, full-time community college students receive, on average, enough assistance to cover **all **their tuition with some left over for books and other expenses. The average net price for four-year college students attending public schools is a mere $2,500, and a hefty $13,000 at private, nonprofit, four-year colleges. Still a far cry from the $44,000 published on the Web pages.
Also note that many of the top elite private colleges, including Harvard, have endowments sufficient to commit to meeting 100% of demonstrated need for their students *without *loans. My alma mater wasn’t quite that rich, but they had enough money to guarantee that every student coming from a family earning less than $50,000 could attend without borrowing any money for tuition. (they didn’t cover room and board, but 18-22 year olds would have to pay their own housing and food expenses even if they weren’t in school)
Harvard, Princeton, and Yale could waive tuition for everybody if they wanted to. I am not making this up; I got it directly from a former principle (that is, president) of McGill whose twin brother was president of Princton at the same time. The reason they don’t is that they want a lot of wealthy alumni. Yes, some do pay the sticker price and there is a reason.
My DIL had $150,000 loan for med school. Now she is a practicing physician and has essentially converted her debt into a mortgage backed by future salary; she is employed by a hospital on salary.