With the financial crisis of 2008, and the Chinese stock market just last year fresh in our minds, we tend to get a bit jumpy about what the next bubble could be.
Everyone has their own reasons for looking out for the next bubble. Some are looking for that once in a lifetime opportunity to cash in and become rich overnight. Others simply want to make sure their investments don’t take a hit. And then there are still others who would want to reshuffle their portfolio to reduce the risk.
Constant incremental run-ups in debt for any segment are could signal a bubble. We have seen the same in the subprime mortgage scenario during the 2008 crisis.
The next segment that lots of people have their eyes on is the student loan segment, which has seen debt ballooning in recent years. Many are referring it to as student loan bubble.
The cause of a potential student loan bubble
Why has this happened?
The basic premises are simple, over the past few years education has become expensive. More and more families have to depend on student loans to cover tuition expenses.
After all, it’s age old wisdom that one of the few ways up the ladder in life is by going through a good college.
A growing emphasis on education has translated into higher number of college enrollments since the 1960s. However, getting into the best colleges requires one to shell out good money as well. This should be a worthwhile investment right? Because good colleges = good jobs.
The truth is, the resultant jobs aren’t always high paying enough that you can get rid of your student loan in a flash.
The presence of this new wave of graduates have led to stricter job requirements. Now, most jobs need even higher degrees, which again push job seekers to attain higher education. All this results in a never ending cycle, and is causing student loan debts to mount. In simple terms, the supply is slowly and constantly exceeding demand – could a student loan bubble be on the horizon?
Are we in a student loan bubble right now and can it cause a crash?
Instead of providing you with a yes or no answer, let us look at the facts on hand.
According to a report by the Wall Street Journal, about 40% of people who borrowed for student loans are either unable to make their payments or are lagging behind.
To bring finances into perspective, this translates to about 3.6 million individuals who owe about $56 million and are unable to pay their debts. And then there are about 3 million more borrowers who owe $66 billion whose repayments are running behind by a month at least. This is summarized in the chart below:
It is not very fair to compare the mortgage crisis with the student loan. The housing loan market accounted for about two thirds of the GDP of the United States, which is the reason it had such an impact.
Student loan debt on the other hand is much smaller than subprime mortgage debt. Still, student loan debt stands at more than $100 billion and is something that cannot simply be swept under the rug. Couple that with the fact that the student loan debt situation is increasing by a staggering amount of $100 billion every year, and you’d see why saying there is no student loan bubble is a naïve understatement at the very least.
In fact, there has been evidence of the administration trying to hamper with the values and making them appear them to be much lower than they are. Several industry experts and businessmen have also raised concerns about an impending student loan bubble.
At the end of the day, student loans don’t help the overall economy. As more people take loans and start repaying them, they contribute less to consumption of products. They’ll tend to hold on buying that car or house, because they have to pay off their loan first. This leads to economic stagnation as well.
What should we do if we are in a student loan bubble?
Though much evidence points to a student loan bubble forming rapidly, the idea of it bursting and crippling the economy doesn’t add up according to many experts. For sure, it’ll make a dent in the economy. But it might not cause the devastating effects that the subprime mortgage did. At worse, it would bring about a political crisis, but a financial crisis seems farfetched at this point.
As an investor, you therefore do not have to worry about a 2008-eque bubble wiping out your investment portfolio.
As a young graduate saddled with student loans though, there a few things thatyou should be aware of. First and foremost, almost 85% of all the student loans are backed up by the Department of Education. It must also be noted that in extreme cases, one cannot file for bankruptcy if they have outstanding student loan. However there are provisions which might allow writing some of it off when kept for a longer tenure of time. But that is also subject to change in administrations.
Thus it is advisable to continue with your repayments or at least pay off the minimum requirements on a regular basis.
The student loan bubble is a real situation with enough statistics and data to back it up. But given its structure and other intricacies, it doesn’t seem at this point that it would bring about a financial crisis like the subprime mortgage did. It simply doesn’t have that big an impact on the GDP as of now.
Mounting student loan problems should not deter people from following their dreams or pursuing higher education. Some studies show that having a graduation degree would entitle you to earn $2.8 million more when compared to someone without a graduation.
What do you think – Is there a student loan bubble? Let us know in the comments below!