Is the Student Loan Debt Bubble Ready to Burst? | Credit Karma Blog

May 17th, 2012

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**Today?s guest post is contributed by Harry Campbell.**

This spring, more than 1 million new graduates will be thrust into the work force. And according to a recently published Rutger?s study, more may come out of school with debt than come out with jobs. Today?s graduates face the perfect storm of a weak job market combined with an overly saturated applicant pool. There was a time when a college degree held significant value and graduates would be inundated with job offers. That time has passed, and now there looms a bigger problem.

We all know the cost of college is skyrocketing. Public and even private schools have increased their tuitions at a pace that severely eclipses inflation. Since 1981, the price of tuition at US colleges has increased 6.4% annually, more than double that of inflation. These unsustainable tuitions are afforded, in large part, by student loans. Student loan debt has now grown to over $1 trillion, surpassing even credit card and auto debt. Universities are responding to budget cuts by increasing tuition and students are taking out more and more debt in order to finance this whole operation.

Signs of a Bubble

During the housing bubble, cheap money was made available to people who had no business owning properties. Banks were even making up investment options like interest only mortgages to entice borrowers. Eventually the market could not support rising house prices and the housing bubble burst. Similarly, the price of college will continue to rise until the market revolts. But unfortunately for students, student loan debt cannot be discharged in bankruptcy court and social security payments can even be garnished to pay off student debt.

Currently, there is almost no underwriting on student loans. 17-year-old high school students and their parents are being allowed over and over to determine what level of financial burden they can take on. So far, students have seemed willing to shoulder tremendous amounts of debt in order to pursue the college of their dreams. In fact, 1 in 5 students from the Rutger?s survey actually deferred their student loans by going to graduate school and taking on more debt! The point of all this is that getting a student loan has become too easy.

A Presidential Debate

Mitt Romney and President Obama have recently come to the defense of student loans, asking congress to maintain the current low rate of 3.4% on new Stafford loans for another year. With so many young professionals struggling to pay off debt, this seems like a no brainer, right?

However, we need more than a 1 year or temporary fix. Government budgets are cutting more and more from public education, and in response, universities are raising their tuitions and in turn raising student debt. Given the current job market, many students from the Rutgers survey indicate they would actually choose a different major if they could do it all over again. Nearly half of them were actually working at jobs that didn?t even require a college degree.

Is College for Everyone?

I think too much emphasis is being placed on going to college these days. I don?t think it?s a good investment to go into $100,000 of debt to get a humanities or fine arts degree from a mid-level university. From a financial stand point, this is a bad investment. Unfortunately, the government is making lots of bad investments with student loans.

The government needs to focus their efforts on awareness. As the study above showed, upon entering a stale job market, many students wish they could go back and change majors. Does a 3.4% or 6.8% interest rate really make much of a difference when you?re working a minimum wage job and saddled with $100,000 of debt? My solution is to force colleges to show true rates of employment and pay by major right next to yearly tuition. I think a lot of students would make different choices given this information.

The real question here isn?t whether the student loan debt bubble will pop, but when? Prospective parents of college students should not ignore common sense in obtaining a degree. People used to say you can?t put a price on education, but that axiom no longer holds true. The cost of college is becoming more and more ludicrous and student loans are only allowing the madness to continue.

Discussion Questions: Do you think student loan debt is a problem? Should student loans be looked at more like an investment or do you think our current setup is acceptable?

Harry Campbell is the founder of Your Personal Finance Pro; he lives and works as an Aerospace Engineer in San Diego, CA. Harry started his blog in January of 2012 and writes about real estate and personal financial advice for young professionals.

Opinions expressed are solely those of the author and do not necessarily reflect the opinions of CreditKarma.com or its founders.

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