Student Loans: The Next Housing Crisis?

February 4, 2013

The same policy gurus that cooked up the housing crisis, a post office on the brink of disaster and an education system that fails to educate our youth provide the latest debacle: the student loan crisis. With total loan amounts increasing at an exponential rate, it is only a matter of time before loan defaults occur en masse, says Jay Bowen of the Foundation for Economic Education.

  • Outstanding student loans are now close to $1 trillion, according to Federal Reserve Bank of New York. This makes student loans the largest and fastest growing share of non-mortgage consumer borrowing.
  • Total student loans have grown by 75 percent since 2007, while other forms of consumer debt have fallen -- both likely effects of the economic downturn.
  • The Department of Education lent $133 billion in 2010 and $157 billion in 2011.

The trend in late student loan repayments is mirroring a pattern seen during the subprime mortgage crisis. The U.S. Department of Education has created programs that allow leniency through "income-based" repayment plans and forbearance timetables. Bowen projects that taxpayers may eventually be responsible for tens of billions of dollars in unpaid student loans.

  • Sixty-six percent of recent college grads have outstanding student loans totaling more than $25,000.
  • Fifty-three percent of recent college graduates are unemployed or underemployed.
  • Tuition at public, four-year universities has risen by an inflation-adjusted 72 percent since 2000.

The meteoric rise in tuition costs is partly due to more students receiving blind encouragement to borrow large sums of money for school. With the government spigot open wide, universities have realized that as much as they charge, the students will be able to borrow that and more. This has led to large college bureaucracies that are inefficient.

Student debt of this magnitude can have important social consequences. Recent graduates, struggling to pay off their loans, may delay buying a house or getting married. Before the student loan bubble bursts and taxpayers are on the hook for billions, the government needs to quit overspending and exit the lending market.

Private market underwriting standards and arrangements between private employers and students could solve some of the student loan problem. In the long run, Bowen says that the government should not intervene aggressively in the education market and instead return to the principles of limited government in the free market.

Source: Jay Bowen, "Student Loans: Another Federal Debacle," The Freeman, January 29, 2013.

 

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