The student loan bubble. What is it? How come it doesn't seem to be going anywhere? And how can you factor it in to your plans on how you pay for college or make your student loan payments? The student loan bubble isn't going anywhere anytime soon, so you might as well get yourself accustomed to it so you don't find yourself stuck in it too.
While recent news of a booming economy and low unemployment might make it look like things are on the up and up, the financial outlook for today’s college students and recent graduates is still pretty bleak.
These new developments haven’t lead to higher wages for graduates already struggling to pay down massive debt, let alone ease the minds of current students who will soon be on the hook for six-figure student loans.
In 2018, student loan debt in the United States hit a whopping $1.5 trillion, making it the second-largest consumer debt segment in the country after mortgages, according to the Federal Reserve. That number keeps growing.
Experts generally agree that a bubble is created when something rapidly increases in price over a relatively short time span.
In addition to the overvaluing of a particular asset, an economic bubble has a few other features:
When we look at the student loan debt crisis, we can see it has a lot of the features of an economic bubble.
In the last 10 years alone, average tuition and fee prices have increased by 36% at public four-year institutions and 26% at private four-year colleges. And college isn’t just getting more expensive - the loans students are taking out to pay for college are getting more expensive, too.
In 2018, undergraduate interest loan rates jumped to five percent - the highest rate since 2009 - and students seeking graduate and professional degrees now face a seven percent interest rate, according to the U.S. Department of Education.
This double whammy of rising tuition and borrowing costs doesn’t bode well for students paying off loans. The total U.S. student loan debt has grown by almost 157 percent over the last 11 years. In comparison, auto loan debt has only grown by 52% while mortgage and credit card debt actually fell by about one percent, according to Bloomberg.
For-profit college graduates are in the worst shape. For-profit colleges pitched themselves as a way out of low-paying jobs, but many of those degrees ultimately proved useless. In fact, many for-profit college graduates are earning less than minimum wage.
If you’re a minority graduate, discrimination in the labor market can make matters even worse. Now, the situation has reached a crisis point where many graduates literally can’t afford to pay back their loans. Student loan debt currently has the highest 90+ day delinquency rate of all household debt. 10% of student loan borrowers are at least 90 days delinquent (mortgages and auto loans have a one percent and four percent delinquency rate, respectively).
For example, with the housing crisis, when a borrower couldn’t pay their mortgage, the bank foreclosed on their house. The bank then sold these assets, even at a loss, causing the bubble to pop. Even though the economic effects are devastating, this kind of deflation can happen relatively quickly.
In comparison, student loan debt is backed by the borrower's future earnings. As long as there is earning potential, the student loan bubble can keep growing. Plus, there is no incentive for colleges to lower the cost of admission. And given that policymakers allow virtually limitless student loan borrowing to cover the costs, the debt load can continue to grow regardless of students’ ability to pay it back.
So what can students and new grads do in the meantime? To start, be proactive when researching different repayment plans and take advantage of income-based plans, if possible. Also, remember that loans aren’t the only way to finance your education. Merit-based awards, tuition discounts, scholarships, and bursaries are all great ways to cover the cost of school without going into debt.
Something else to consider is refinancing your student loans after you get a job. You can do this if you feel like your payments are too much to handle, or if you feel like years are passing and you're not even making a dent in your student loan debt.
Check out all the refinance options we have curated here to get a head start on how this option could affect your future.
Student loans can’t always be avoided. But at the end of the day, your top priority should be to find a school you can afford. As a rule of thumb, you should never take out more student loan debt than you will earn in your first year’s salary.
So if you expect to earn $50,000 right out of college, you shouldn't have more than $50,000 in student loans total. This might mean you’ll have to adjust your expectations around studying out-of-state, or stick to a tight budget while you’re in school.
No matter what you decide to do, remember that the most important thing you can do today is to keep your debt at a manageable level so you’re not struggling financially later on.