Student Debt Bubble - part 3

WILL STUDENT DEBT BE AMERICA’S NEXT FINANCIAL BUBBLE?

by staff writers from Online Colleges
June 27, 2013

STUDENT DEBT IN THE U.S. (PART 3)

The third of a three-article series about steady growth of student debt across the country.  The first article examines the dynamic between reduced state spending, higher tuition rates, and increased student debt levels.  The second article examines some potential consequences of the student debt crisis, particularly at the historical connection between tuition and debt.

Experts continue to debate whether student debt in the U.S. will lead to an economic bubble; one which, when it bursts, will mean dire consequences for the whole economy. As tuition rises, students are simply borrowing more and more; many financial experts worry graduates won’t be able to keep up. Most income levels don’t leave graduates prepared to handle large amounts of debt; when students make their monthly loan payments, they end up with less to spend on cars, houses and other consumer goods. So could paying off student debt cause the economy to plummet? Let’s explore the debt situation today and examine the potential for such a disaster.

CURRENT DEBT STATISTICS

The last two decades have been marked by sharp increases in student debt, leading to record highs in 2013. According to a report by Mark Kantrowitz of Edvisors, the average debt per student is now $30,000. Debt has tripled since 1993 and the reason for it is simple: Colleges just keep hiking their tuition. And while tuition spirals upwards, real income for middle-class workers has essentially stagnated over the last three decades. Today’s graduates aren’t making enough to pay their loans and live a comfortable lifestyle. Analysts worry the most heavily indebted won’t have enough money to buy cars, houses, or much else. Worse yet, some may simply stop paying their loans altogether. This could lead to a severe economic downturn similar to the ones following the housing and dot-com bubbles.

WHAT IS A BUBBLE?

Economic bubbles are cycles that lead to a steep expansion followed by a quick contraction. The triggers of an economic bubble are difficult to pinpoint, but experts believe inflation and excessive pricing of specific products and services (such as tuition) play key roles. Financial roller coasters like these are unpredictable, and lead to disasters on the individual, organizational, and industry level. They can mean financial ruin for many participants who have built their businesses and lives on the high prices that come crashing down.

Homeowners caught in the housing bubble during the period of 2006-2012 faced high foreclosure rates as property values plummeted. Participants in the dot-com bubble experienced a similar crisis during 2000-2001, as people became overly-confident in the value of high-priced stocks. Many investors bought in, hoping the high-priced stocks would continue to grow and pay off. They flooded the market, purchasing shares until people realized the numbers didn’t add up and the market crashed – those who bought into the exuberance lost millions.

WILL STUDENT DEBT BE THE NEXT BUBBLE?

Bubbles occur when a particular market is flooded with people eager to buy in, causing prices to skyrocket. This happened with the U.S. housing market and Silicon Valley startups before that. And it’s what we are seeing today with college enrollment, which grew by 11% between 1990 and 2000 followed by 37% over from 2000 to 2010, according to the Institute of Educational Sciences.

Some experts see clear similarities to past economic bubbles like the housing crisis that brought the whole U.S. economy to its knees. The Federal Advisory Council has certainly noticed the disturbing similarities between student debt and past bubbles, calling attention to the $1 trillion student debt record the nation has reached. They emphasize that as student debt rises, colleges continue to raise the price tag on tuition, creating a vicious cycle.

However, others are not so convinced we’re facing an economic bubble. Professor Robert Archibald from The College of William and Mary does not see the connection between student debt and a looming bubble. Professor Archibald explains student debt is different from debts of the recent past, since bubbles occur when an overpriced product suddenly drops in value. Instead, Professor Archibald contends the price will never come crashing down; students will simply be burdened with ever-growing debt and tuition costs each year.

OTHER CONSEQUENCES OF THE CRISIS

Yet even if prices don’t come crashing down and the bubble never bursts, graduates will face stagnant salaries and potentially long periods of unemployment. It’s difficult to envision an upturn in spending if graduates continue to leave higher education with unmanageable loan payments. Analysts are especially worried about the housing and automobile markets, which won’t see growth in purchases so long as students struggle. As students cut their budgets, rely on rentals, and use public transit, it remains unlikely that automobile and home purchases will rise. In lieu of a crisis, a depression in these key industries could indicate student debt will drag on the economy for years to come.

A true student debt crisis could arise from factors like inflation and the rising price of tuition, to name only two. If things continue along the current course, massive debt will not be a sustainable part of education for new generations of students. Something’s gotta give. The only question is whether student debt will be a hard and fast crisis or a drawn out burden we must shoulder.

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