Student Loan Debt May Be the Next Economic Bubble to Burst

By on | Private & Federal Student Loan Consolidation.

In an interview with Yahoo Finance’s The Daily Ticker on March 30, 2012, former Clinton administration Secretary of Labor Robert Reich referred to the American economic recovery as “anemic,” and discussed the potential for outstanding student loans to be the next debt “bubble” to burst in the U.S.

Student Loan Debt Tops Credit Card Levels

In 2011, American students borrowed in excess of $117 billion, with the Consumer Financial Protection Bureau tracking the total unpaid student debt in the U.S. at more than $1 trillion earlier this year. That is the first time that student loan obligations have exceeded the level of credit card debt in this country.

Increasingly, the question is being asked, however, if a four-year college education is a good “buy.” Reich, now a public policy professor at the University of California at Berkeley said that until three years ago it was “absolutely the case” that a college graduate earned 70-100 percent more that a person with a high school diploma only.

Recession Complicates Work Picture for New Graduates

Now, however, recent college graduates face high unemployment and entry-level positions with significantly lower pay. The news has been filled with stories of Harvard graduates working at Starbucks or taking jobs in retail sales because they could find no other work. In most instances, these jobs offer few if any benefits like health insurance or 401k plan options.

This situation was complicated by the recession that started sometime in 2008, and whose effects continue to linger. Young Americans are entering their working lives with a crushing burden of pre-existing debt that averages $45,000 per student. Since their families’ investments were likely wiped out in the recession, these new graduates also have less of a “fall back” position than previous generations.

Tuition Costs Have Exceeded the Rate of Inflation

College tuition costs continue to rise, to the point that the price of education has climbed faster than the rate of inflation for three decades. A combination of state and federal aid has been the staple to subsidize these degrees, but struggling state governments have cut aid programs in an effort to control costs.

Currently 70 percent of students go to state financed schools, but their families are having to bear more and more of the tuition burden, with rates going up 8.3 percent from 2009 to 2010. Reich said he does not foresee the economy turning around soon. Educational pundits agree that this combination of factors will likely make a four-year education unsupportable for many.

Unlike countries like Germany, Reich said, the U.S. lacks a sophisticated technical training program. Moving ahead, more schools will place a greater emphasis on online learning to control costs since the infrastructure is less expensive to maintain than the “bricks and mortar” model.

In an election year filled with rhetoric about trimming federal expenses, Republicans and other conservatives continue to target federal education assistance. Neither Pell Grants nor Stafford loans have kept pace with rising tuition costs anyway, and although the Obama administration has proposed major changes to link loan payments to income levels, the potential for a student loan bubble “bursting” is strong.