The United States has recently gone through one of the worst recessions in the history of the country, in part, because of issues in the housing market. The bubble burst when house prices skyrocketed higher than market value followed by a steep contraction. We are seeing the same occurrence in higher education in the United States. Each year, the cost of a college education significantly rises, which puts students in more and more debt. The bubble might burst because selling loans together in a bond offering, which is how loans are financed, is becoming less attractive for investors.
The cost of college education rises 8% every year, which means it doubles every 9 years. This far outpaces any other kind of inflation that is tracked. The high cost of education coupled with the weak job market has made repaying loans difficult for many recent graduates. Over 35% of student loans are in delinquency. Also, the average earnings of students with 4-year college degrees is less relative to what it was in 2005. This combination of rising costs of college tuition, poor job market, and lower starting salaries has led to defaulting on student loans.
Student debt affect purchasing power. When students are forced to pay part of their earnings towards a long-term, high-interest loan, they are less capable of purchasing, cars, houses, vacations and other commodities. Because of this, the housing and automobile industries are less likely to be able to recover from the Great Recession. Usually, college graduates, those with new incomes, are the bright spot in the housing and auto markets as they, in the past, were able to make investments in these industries.
The student-loan bubble is not the same as the housing bubble. Total student debt is in the $1 trillion category, but that is a much lower figure than mortgages. The danger lies in delinquency and spending power. If someone cannot make his house payment, he can foreclose the mortgage. If someone cannot make a car payment, he can turn the car in. If someone cannot make a credit card payment, he can file for bankruptcy. Student debt is the only kind of debt that does not have the protections listed above. Student debt sticks around permanently. Debt lenders can garnish wages to help facilitate loan repayment. This negative affects student purchasing power like no other debt market can, which could lead to a different kind of bubble bursting in the near future.
In reality, students should be smarter about earning an education. Taking classes at a community college and earning degrees in fields that have jobs is the smartest way to ensure accruing the least amount of debt and having the best job outlook post graduation. Unfortunately, the prestige of attending an elite, private institution, the excitement of pursuing one’s passion in art history, and the immaturity of taking on more debt than one should all gets in the way of fixing the student debt bubble.
Ava Reed is an avid education and technology blogger who specializes in distance learning. She loves reading, cooking and helping others on their career explorations. “Let’s say ‘no’ to stress; we need to identify a specific career that will allow us to make good use of our talent and skills.”