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The Next Big Bubble: Student Loan Debt

Picture Credit: Nick Youngson

The biggest cultural and social shift that has occurred in the last 20 years was the stressed importance and necessity of young adults to attend college. The age old saying  “money doesn’t grow on trees” that each parent has quoted at least 230 times during a child’s upbringing still holds true today, but the money to pay for college education has to come from somewhere, and like usual, when the people want something, the federal government thought it would be a good idea to get involved.

According the Debt.org, students in the United States are currently in debt $1.2 Trillion in total because of student loans. It would be ideal if students who receive loans from federal entities start paying them off when they graduate and secure a job, however, this is hardly the case in America. According to Forbes, only a mere 37% of in-debt college students make payments on their loans. This problem stems from poor economic conditions that make it harder for college graduates to find employment and “liberal loan forgiveness programs” that offer borrowers and “open invitation” to stop paying their loans, which in return significantly adds to the federal debt. These liberal policies encouraging loan forgiveness, such as the Public Service Loan Forgiveness Program, transfer loan payments from the individual to the government, thus relieving the student from paying back the loan and significantly adding to the federal debt.

According to the Center of American Progress, any institution whose default rate exceeds 30 percent for three consecutive years will lose federal funding, and those institutions with a default rate of more than 40 percent in one year will lose access to just federal loans.

How Do We Fix This?

One of two options should occur. First option, we fix the economy so it picks up. Then, college graduates get hired and can start making payments on their loans. Although, in this scenario, the current educational conditions stay put, allowing the problems that plague the system to continue. But at least the default rate doesn’t climb so high that it causes a recession.

Option two is a complete reform. In this scenario, Congress would either have to take action to ensure better preparation for college graduates to find employment, or encourage universities to better prepare students through tax incentives.

If the system continues along the path it is currently on, more students will start defaulting, raising the federal debt to an even more unsustainable level than it’s already at. The United States economy could even face another bubble recession like the housing bubble recession of the 2000’s. First students default at a higher rate, then the companies who buy federal-loans stock prices drop. Consequently, investors see the sudden dip in prices as an indicator that the economy is slowing and sell their investments, further bringing down stock prices. This effect echoes throughout the stock market, and before people realize what is happening, the United states is back in a recession.

So What?

The housing bubble was a completely different animal. Creative monetary policy could pull the economy out of recession and temporary put a band aid on the situation, such as what happened during the housing bubble. However, I don’t believe creative monetary policy could solve this problem. It would be a recession that stemmed from a tight generational age group, who monetary policy wouldn’t be able to target. I would predict a recession of this degree to last longer mainly because of the uniqueness of the cause.

Regardless, reform needs to take place in the educational system, both in the lower and higher sectors. Without much needed reform, expect the price to go up and the quality to go down. A great place to look for positive improvements that wouldn’t cost billions of dollars and is being implemented on a state level is Wisconsin. Scott Walker, a Republican governor, is making it a goal of his governorship to lower educational prices and increase quality of the UW education system. In conclusion, the United States needs to plan ahead and fix this mess, or risk the looming effects of another economic recession.

 

Follow the author on Twitter: @ryaeng1994

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