Student Debt Crisis Could Be “Far Worse” Than Mortgage Crisis

by Editor on November 16, 2011

Avoid it!

Ben Glaser: Americans now have more student debt than credit card debt and they’re defaulting on student loans at increasing rates. Could this be the beginning of a new bubble even worse than the economic meltdown of 2008? One industry insider, speaking exclusively to Live, says it could be “far worse.”

“Its collapse could resemble the 2008 mortgage crisis,” said the financial analyst, who works closely with student loans, and wished to remain anonymous while speaking critically of their industry. “However it would be far worse. Instead of having a financial meltdown, we would create an entire generation where only the well off in this country will be educated.

“Unlike credit card debt, student loan debt is not discharged with bankruptcy,” they added.

According to many indicators, student debt is a looming crisis in the nation. Student debt is approaching somewhere around $750 billion in the US, approaching $1 trillion. According to the Department of Education, 8.8% of student borrowers who began repaying their loans in fiscal year 2009 defaulted in the first two years, up from 7% in 2008. This rate has increased from 5% in 2006.

Most troubling, students graduating now, many of whom saw student debt as an investment in their future, are simply not finding jobs, as unemployment hovers around 9%.

Discontent over the connection between joblessness and student debt is already evident: The topic is a regular issue in the Occupy Wall Street movement; and one analysis shows that student loans tops the list of concerns of demonstrators on the We Are The 99% tumblr blog.

President Obama has even prioritized student debt as an urgent, national issue. Obama accelerated a law already passed by Congress,which will lower the percentage of discretionary income that will be collected to repay federal student loans, and will reduce the number of years after which the remaining debt will be forgiven. The plan will also allow people with multiple loans of certain types to consolidate them at a lower rate.

But the conditions for crisis, or a “bubble” still remain, as record numbers of Americans seek higher education, and tenacious unemployment rates face them when they graduate.

Justin Pope at the Associated Press suggests that “there isn’t one big bubble,” but many smaller ones. He notes that for-profit institutions, like the University of Phoneix, Kaplan University, or DeVry University, show “unmistakable” signs of a bubble:

“Enrollment has tripled in a decade, roughly 96 percent of graduates have loans and borrowing is substantially higher than at other types of institutions. Default rates recently jumped to 15 percent.”

Pope also notes that the worst hit are those who accumulate debt, but never graduate. Almost half of students at four-year public universities fail to graduate within six years.

The issue feeds into a much larger debate about higher education, and whether a four-year degree should be considered the goal for all students. Arguably, higher ed has been growing a bubble since the Baby Boom.

The anonymous analyst is generally pessimistic if the U.S. continues along its current path. Obama’s actions are “a great step forward…but does nothing to help those with private student loan debt. It is like giving someone a Band Aid when surgery is needed.”

“Something must change,” the analyst says, though they have heard only one Republican candidate discuss the student debt issue: Jon Huntsman.

What do you think? Do you have student debt? How can it be made manageable?