The Coming Student Loan Bubble â“ and what You can do about it!

financial bubbleA bubble❠starts to develop when the majority of people pour their money into a financial endeavor to such a degree that no one ever challenges the wisdom of what’s happening. It’s presumed to be right on the strength that everyone’s doing it.

In recent years, we’ve seen bubbles develop in the stock market and in the real estate market. Everyone plowed their money into both until there was no one left to invest, then gravity took it’s course and a lot of people lost a lot of money.

Could the same thing happen with student loans? It’s sure starting to look that way. Most people can no longer afford the cost of college, at least not if they have to pay cash to attend. They’re relying increasingly on borrowed money to get their education, and the numbers are starting to look threatening.

The facts on student loans

A recent report came out indicating that about one in every five households is carrying student loan debt. That statistic is even more disturbing when you consider that only about 50% of the college age population actually ever enrolls in college. Only about half of those ever finish. Put another way, 25% of the population have college degrees and something close to 80% of them are carrying student loans.

What this tells us is that the majority of college graduates are using student loans to pay for at least part of the cost of attending school.

The same report indicated that the average debt load being carried was $26,682. That number is from 2010â”we can assume that it’s even higher now. In fact, the average amount of student loan debt has doubled since 1989.

What’s driving the debt and creating the bubble

College costs are rising relentlessly, and this is forcing students to rely more heavily on debt as a way to pay. This is where the bubble factor enters the picture. Loans are the reason why college costs have been able to rise despite the recession and the toll it’s taken on many middle class families. What students lack in ability to pay is being covered by loans.

In a classic bubble, prices rise past the ability of the average consumer to buy. Loan programs enable prices to rise past this point, setting up a collapseâ”the bursting of the bubble.

The eerie parallels to the mortgage business

With the mortgage meltdown still in recent memory, we should consider the parallels to student debt.

It was the goal of the government that everyone who wanted to own a home should be able to do so. That opens the question however, what do we do about those who can’t afford a home?

Answer: financing.

The mortgage industry responded to the challenge of getting a home for everyone who wanted to own a one with non-qualifier loans. This included no-income verification loans, no down/100% financing loans, and loans for people with poor credit.

How does that relate to student loans? There are no required qualifications for student loans either! Any one who wants one can get one. A student can wrack up six figures in student loan debt without ever having to prove the ability to repay them.

That’s sending young people flocking to college in record numbers. Home ownership rates reached record highs (near 70%) just before housing tanked.

On the strength of student loans, many college careers are becoming saturated. That’s putting downward pressure on both salaries and jobs, affecting the ability to repay. Whether it’s a house or a college degree, once too many people have them, they’re of less value.

That’s when the bubble bursts.

Don’t be one of the victims of this bubble

If you’re making the college decision for yourself or your children, you can avoid this bubble. Look for less expensive schools, work/study programs, or ways to pay for college without having to rely on student loans.

If you’re out of school and your student loans are already a problem, look into the Income-Based Repayment plan, or IBR. Under the program, your student loan repayments can either be reduced to a percentage of your income, or even partially forgiven. There is a calculator that can tell you if you qualify.

Do you see a bubble developing with student loans?

photo by Justin D Miller