Student Debt Bubble - part 2

THE FUTURE OF STUDENT DEBT

This silver lining in all this is that policymakers, college administrators, borrowers, parents, students, and prospective college enrollees are at least aware of the problem, and many are proposing solutions.

One popular route is to eschew the traditional four-year college in favor of a vocational certificate program. In 2012, manufacturers reported that as many as 600,000 jobs went unfilled because workers lacked vocational skills. In fact, a recent report noted there are 29 million jobs in the U.S. that require vocational skills but not a bachelor’s degree, and most award an annual salary of $35,000 or more.

Some solutions look to change the terms of the loans themselves. In addition to locking in low interest rates on federal student loans, some lawmakers are seeking to add provisions such as debt forgiveness for those who have made payments for a period of time, as well as suspension of interest accrual during times of high unemployment.

Another idea, put forward by Senator Kirsten Gillibrand (D-N.Y.), would allow borrowers with student loan debt to refinance at a lower, fixed interest rate, in the same way people refinance their mortgages. Resulting in a savings of an estimated $14.5 billion for borrowers in the first year alone. Sounds like a no-brainer, right?

Wrong. Many don’t realize that Wall Street (and thus, lots of people with a 401k) invests in student debt to the tune of $291 billion. Additionally, the Department of Education owns another $600 billion in loan debt; experts predict the DOE will generate a profit of $51 billion from these funds in 2013. With so many powerful interests standing to lose by transferring this money back to borrowers, it’s unlikely that a bill like Senator Gillibrand’s – which has no co-sponsors – will pass.

No one has a clear idea of what the future holds for education borrowers, but all agree that solutions are needed to ameliorate the student debt crisis. With ever more experts forecasting a burst of the student debt bubble, perhaps lenders and investors will have some incentive to work proactively with borrowers to make student loan repayment easier. In any event, until we act, our young people will continue to face more and more debt on an annual basis.