NCPA - National Center for Policy Analysis

Are Student Loans Next?

August 9, 2011

A growing chorus of economists and educators think that the higher education industry will be America's next bubble.  Easy credit, high tuition and poor job prospects have resulted in growing delinquency and default rates on nearly $1 trillion worth of private and federally subsidized loans.  Now the ratings agency Moody's has weighed in with a chilling diagnosis, says Mike Riggs, an associate editor at Reason magazine: "Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place."

  • In August 2010 financial aid guru Mark Kantrowitz announced that student loan debt had, for the first time, surpassed credit card debt.
  • A month later, the Department of Education announced that default rates for student loans jumped from 4.6 percent in 2005 to 7 percent in 2008, the most recent year for which data is available.

Moody's projects that delinquency and default rates will actually get worse, even if the economy recovers in the next few years (itself an increasingly unlikely prospect).

To start, it helps to understand why student loans are doing poorly.

  • Unlike home and auto loans, the conditions for which have been tightened drastically since 2008, student loans are for everybody.
  • Borrowing isn't based on income or even a salary expectation, but the promise that a college degree will pay for itself.
  • But with unemployment hovering around 9 percent, college graduates from the best programs and schools are finding that's not the case.

The report authors anticipate bleak times ahead if the federal government and private banks maintain their relaxed lending standards, especially if they continue to lend with the expectation that students will be able to pay them back.

Source: Mike Riggs, "Moody's Sounds the Alarm on Student Borrowing," Reason Magazine, August 5, 2011.

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