I’m getting very, very worried about my 401k right now.
In fact, I’m getting very worried about all of my investments. I’m afraid we may be heading into a bigger financial disaster than the housing crisis.
I’m talking about the Student Loan bubble.
Now I’m not an economist, and I’m also not a conspiracy theorist. I’m just a personal finance blogger who sees something that looks like a big problem, with nobody doing anything to address it.
You might be thinking, “Who cares about a student loan bubble? How does that affect my personal financial situation?” The fact is, any bubble bursting (think the Housing bubble in 2008 and the Dot-com bubble in 2000) will usually result in a recession or even depression. If you see a bubble burst coming, it is important to make practical changes to your financial life to prepare for these situations. Today I’m going to explain why I’m concerned about student loans, and tomorrow I will discuss where you can safely store your money or wealth in case of a double dip recession or even a depression.
Student Loan Debt is Getting Out of Control
Last year, the amount of outstanding student loan debt surpassed the amount of outstanding credit card debt. There is over $850 billion in student loan debt outstanding today. That’s a lot of money.
Another very telling statistic is that student loan debt has risen 511% since 1999. As a comparison, non-student loan debt has risen less than 150% in the same time frame. When one type of debt is growing significantly faster than anything else, you have the potential for a bubble. Here’s the scary graph that shows it all:
Does this mean we definitely have a student loan bubble? Not necessarily. This is just one piece of information that may have a reasonable explanation.
However, the costs of college are rising at an extraordinary rate (with no signs of slowing down), and college graduates are having a hard time finding gainful employment. When you have lots of people borrowing increasingly large sums of money, and many of those same people are finding themselves under or unemployed, it looks like a problem to me.
Many College Grads Aren’t Qualified for High Paying Jobs
Remember the housing bubble? Part of the reason that bubble existed was because people who really couldn’t afford to pay mortgages were getting approved for very expensive loans. If there were more rigorous standards for approving people for home loans, we may never have experienced a housing bubble.
Now compare this to eduction, where basically everyone is eligible for Stafford Loans. There is no credit check. People with no money in the bank and no income are getting tens of thousands of dollars in loans. All you have to do is be a student and fill out a FAFSA, and you’re qualified.
Checking creditworthiness of the borrower before they enter college might be a good idea, but most students don’t have money. They are going to college to get a job and theoretically pay the loans back after they’ve received their education and found gainful employment. So wouldn’t it make sense to give loans according to projected earnings after graduation? The problem is, these loans pay no attention to the student’s major and gives all students the same availability of credit.
According to PayScale.com, someone majoring in Child and Family Studies is looking at making $29,600 a year out of college, and only $40,500 once they reach mid career. It’s also important to consider this is not only a low paying field, but also one with very low demand for new workers. Compare that to a Petroleum Engineering major, who is looking at $97,900 a year right out of college, and $155,000 once they reach mid career.
Common sense tells us that the average Petroleum Engineering major is more creditworthy than the average Child and Family Studies major. However, students in both programs are eligible for the exact same amount of student loans.
Any system where these two people have the exact same access to funds has a very serious, fundamental problem in my opinion.
Is This Bubble Going to Burst?
Again, I’m not an economist, so I don’t know if this really is a bubble or not. But let’s look at some of the facts.
In 2008, the average graduating senior had $23,186 in student loan debt (not including loans parents took out for their kids education). Since then college costs have risen dramatically every year, and more people are going back to school because they can’t find jobs in this economy. Who knows how high that number is today?
It’s also scary to think that 22.4% of college grads from 2009 are not employed.
We have a very large population of people who have massive amounts of student loan debt. Many of those people have no jobs, and others have jobs paying much less than they expected to make when they took out such massive loans. Unless our economy gets kick started immediately, we will continue adding new graduates to the list of unemployed adults with enormous student loan obligations. This clearly is not sustainable and could reach a breaking point at any moment.
Maybe there is a Bubble. What Should I Do?
The most worrisome aspect of this entire situation is the fact that people aren’t talking about it. You can’t address a problem if you don’t recognize a problem exists. So either this isn’t a problem, or we’re all in big trouble.
I’m trying my best not to sound like a conspiracy theorist, but this has me really worried. Even if there is a 5% chance that this bubble does exist and may burst, then I think it’s important to put at least a portion of your net worth into assets that would maintain or even rise in value during this scenario. Check out my post on Preparing for a Bubble Bursting when I give my suggestions on how to financially prepare for the worst.
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
I agree that you can’t address a problem if you don’t recognize a problem exists, and thats why this is a great post! so important to talk about this stuff. good work Kevin, thank you.
Thanks Katie. I really hope I’m wrong here, but I don’t know…
This is a big problem.
Instead of trying to get to the root of the problem, the Gov’t is just throwing more money into student loan programs and tax breaks for education.
Just like health care, no one is investigating why tuition is spiking at the same time enrollment is increasing. Is it supply and demand, a ton of demand with limited spots? I see colleges and universities losing more federal and state funding, is it to cover those losses?
Don’t worry; I’m sure people who borrowed too much money for too little education will be bailed out. It’s already happening in public service, where anyone who works in a public job (police, firefighters, teachers, etc.) only have to pay a small percentage of their income on their loans for 10 years. After the 10 years pass, the balance is wiped out.
Source?
I’m a School Counselor with tons of student loan debt (Master’s Degree required, same salary as a teacher), and I’ve heard NOTHING of paying “a small percentage of my income” for 10 years, then having the remaining balance wiped out.
I’m a high school teacher currently enrolled in the public service program. I pay $150 per month on 74k and am seven years from forgiveness. I have so much debt because I chose to go to a top-5 program in my field for my Masters–I knew going in about public service loan forgiveness. That decision appears to be paying off; despite graduating in 2008, I make a great salary for a teacher–between my base salary and extra stuff I do in education (I wrote curriculum, evaluate AP essays, etc), I make 75k a year.
You have to qualify for the program, though. There are hoops to jump through. Google “Public Service Loan Forgiveness.”
So you’re paying $18,000 to repay $74,000 in student loan debt? Must be nice.
It’s the income based repayment plan for public employees:
http://www.finaid.org/loans/ibr.phtml
Wow. Thanks a lot, guys. This could potentially do a whole lot for us. Between my wife and I, we have over 80k in student loan debt, and we make less that 100k together, plus we have a baby. How have I not heard of this before now?
Jon, I’m glad to see you got some good information for your personal situation! Thanks to all the commentors for helping him out! You guys are awesome.
Jon,
One thing to note is that you have to have all federal loans. If you have any private or “PLUS” loans they must be consolidated through the federal student loan debt consolidation plan.
Forgiveness for pubic servants makes sense. For the rest of the population, not so much. How do you think all the people who were responsible enough to pay off their student loans or pay for their education in cash will feel about their tax dollars also paying for people who weren’t responsible enough to pay for their own loans? The backlash would rightfully be outrageous.
Wait a sec…
I am all for forgiving loans to a certain extent and for certain public sector employees, but…
If you go to Harvard and Yale to get social work degrees, I am only for limited forgiveness for your loans. You run up that type of student debt only to get paid $30K a year? Frankly, you don’t deserve for them all to be forgiven.
I agree, tom. It’s a great way to encourage bad decision-making, and reward those who previously made bad decisions.
It must be nice to borrow $100k on a student loan like a moron for a low-paying degree and end up better off than someone who played it smart, worked through school and borrowed a little and actually THOUGHT about the cost of tuition in what they did.
I am a current college student, one year remaining. This is quite worrisome as I have had to take out extra loans to cover my cost of living. The problem is still basic and has to do with jobs and employment, not necessarily employability (which we go to college to acquire). We cannot rely on governmental programs to create jobs solely. It is time we take charge, anyone can be a business owner and file for a business license or start an LLC. Entrepreneurs unite!
It is a good idea to make your own job if you can’t find one. For the entrepreneurs out there, it’s a great idea. However, if you were going to open your own business and be your own boss, you probably didn’t need the education anyway.
The whole student loan thing shocks me. When I hear someone say “I have $70,000 in student loans and make $35,000” or something like that I just don’t understand. You can make $35,000 without going to college! Why take on all that debt?
Is it a bubble? I have no idea. But I do think there are going to be some major shifts in the college world… good or bad? we’ll see.
That’s a great point. I think the problem with a lot of college degrees is that they aren’t specialized so they don’t qualify the degree holder for anything. When you spend four years for a degree and don’t get any real skills, then you truly did waste all that time and money simply for a piece of paper.
All I know is our country is in trouble, amd it’s going to get much worse before it gets better.
I think you have a few of your facts mixed up. While its true that many students are graduating with way more student loan debt than anyone would advise, they are not getting it all from the Federal Government. I worked as a financial aid advisor in high schools helping high school seniors find solutions for paying for college. I also referenced www.finaid.org to verify this information. (http://www.finaid.org/loans/studentloan.phtml)
From filling out the FAFSA, a student considered dependent to their parents (under 24, no children, not married, and no state record of abuse, etc) they can be given the following loans:
1st year: $2,000 unsubsidized, $3,500 subsidized
2nd year: $2,000 unsubsidized, $4,500 subsidized
3rd &4th year: $2,000 unsubsidized, $5,500 subsidized.
This makes the maximum in Federal Student Stafford loans (without Parent loans taken into consideration) a traditional college student can get is: $18,000.
If a student is independent they can take out an additional $4,000 in unsubsidized loans a year, making their maximum total: $34,000.
I will point out there are a few other loans that were in existence, but are being phased out of the lending practices:
-Perkins Loan (Max $5,000 per year, subsidized interest)
-No Interest Loans (state by state basis, dependent on institutional participation– exists for rare cases in Massachusetts).
-Parent PLUS Loan (a loan taken out in the PARENT’S name for the remaining cost after financial aid on a students’ bill – note independent students can not take this loan out)
Now this is principle debt, so it does not include the amount of interest accruing on the unsubsidized loans (the subsidized loans’ interest is paid for by the government while a student is in school 1/2 time or greater), but that interest is manageable.
If I do my math correctly, if a student is independent (rare situation for the traditional college student) and was offered Perkins loans (which would have only happened in the past, not moving forward), s/he could have a max principle debt of:
$54,000.
I, too, feel the rising cost of college is a problem. I worked in this field and paid my way through college and graduate school. But, we cannot be ignore that many college students today are negligent in their borrowing practices. Going to college and choosing to fund it is a big responsibility and our schools, community organizations, and families need to begin teaching students basic financial literacy, instead of blaming a system that has enabled first-generation and low income students (like myself) to graduate from college.
It seems there is a potential for bubble based on the data of the article. It is surely will burst if in future, the students cannot find the job to pay their student loan — indeed, not only student loan but it is a high student loan.
This was a wonderfully helpful article!Your tips will definitely come in handy. Thanks for writing a great article! I’d like see more from you!! Keep posting… It’s very helpful….
That is quite a worrisome chart and looks like the majority of debt growth over the past 7 years or so has been student related debt. I wonder if we are seeing higher rates of graduation at the same time. I would doubt it. I know some people who have debt but no degree. That is terrible. Maybe students will start to figure this out and opt for less expensive alternatives.
I’ve had this thought too — not as a ‘loan bubble’ but just as a ‘value of college’ bubble. College has been touted as an investment, but lately this ‘investment’ has really lost a lot of steam.
There are plenty of great non-financial reasons to go to college — including being an overall well-rounded person with good critical thinking skills — but the “investment” of going to college is a bubble that needs to pop soon.
I’m glad I didn’t go to grad school like my parents wanted. That would have been a waste, especially since I would have either majored in journalism (no jobs!) or gotten an MBA (too many grads!)
Value, value, value…most students starting school do not consider this carefully, nor have the depth of financial literacy to make a sound long-term decision. Check this inforgraphic:
http://howwillipayforcollege.blogspot.com/2011/08/infographic-why-exactly-should-i.html
and this post:
http://howwillipayforcollege.blogspot.com/2011/08/choose-wisely-what-are-you-getting-for.html
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Kevin,
I’ve been thinking more about the student loan problem you discussed here. I’d be interested to know your thoughts on my story about Slanted Snout – the link is below.
Cheers
TMG