Student Loan Crisis Is A Bubble On The Verge of Bursting

April 9, 2015

Take a look at the figures below, shared recently by the United States Federal Reserve and the national credit bureaus:

  • Approximately 40 million Americans have a student loan to pay off
  • The average borrower takes out four student loans for education in college amounting to around $29,000
  • Student loans have the highest delinquency rate of any form of household credit
  • Student loans are the second largest category of consumer debt since 2010; at present, they are second only to mortgages
  • Data held by the Federal Reserve shows that the delinquency rates for student loans are near the all-time high – this statistic dates back to the first time when the Federal Reserve began collecting data on student loans in 2003
  • Only 37 percent of total student loan balances are in repayment and not delinquent
  • About two-thirds of the remaining borrowers are:
    • Behind on their payments
    • In default or,
    • Have entered a variety of deferral programs to delay making payments

Given this backdrop, writes Simon Black, it becomes clear that the student loan crisis is a bubble on the verge of bursting.

The Implications of Taking Out Student Loans

Every day, headlines abound with stories of college graduates leaving school with debt amounting to tens of thousands of dollars. Black argues that debt is a form of servitude. The pressures of having massive debts to repay eventually end up keeping many students tied to jobs they dislike, in places they don’t want to work, for bosses they dislike.

In other words, debt ties students to working in jobs that do no justice to their skills, their talents or their potential. It is hardly surprising that many students end up feeling disillusioned and unfulfilled. Black even compares the situation to the condition of the serfs in medieval times.

To aggravate matters further, debt makes it hard for students to rub the slate clean and start afresh. Cases abound where students found it legally impossible to discharge their student loans by filing for bankruptcy. A small percentage do manage to discharge their student loans in the bankruptcy courts, but these instances are rare.

The True Cost of Debt

When students graduate, they will have spent about four formative years of their lives learning and discussing theoretical aspects of a topic. They will also have debt of several thousands of dollars that they will need to start repaying shortly. Despite the benefits that a university degree offers, Black concludes that the contemporary education system ends up forcing students to give up options available to them, thereby robbing them of the opportunity to live life deliberately.

The modern education system necessitates that students take on immense amounts of debt to pay for college but does not offer enough assistance in selecting their vocation or in matching the student’s skills with a specific career. Therefore, when students leave school, the only thing on their minds is their debt and the need to find a job that will enable them to repay the student loan. These thoughts take precedence over identifying their true calling in life. When confronted by life’s realities, many individuals prefer giving up their liberty to choose; this is the true cost of dealing with debt.

Is College Worth the Cost?

A recent analysis by Jaison R Abel and Richard Deitz of the Federal Reserve Bank of New York vindicates the worth of a college degree.

Researchers found that people with bachelor’s degrees earned $300,000 more over their lifetimes than people who only had a high school education. This figure was more than three times the value of the college degree in 1980, when college graduates earned about $80,000 more than people with high school degrees did.

The researchers established that the value of a bachelor’s degree has remained at an all-time high for well over a decade and that the value of the degree peaked in the late 1990s, before taking some hits during the recent financial crisis. Despite this, the researchers concluded that the net present value of a college degree has hovered around $300,000 for over one decade. Wages for workers with high school educations have decreased dramatically, thereby widening the income gap between these workers and individuals with college degrees.

They also found that Americans were taking less time to recover the costs of attending college than they did several decades ago. For instance, in the late 1970s American graduates took an average of 25 years to recoup the costs of getting a bachelor’s degree. Since the 80s, this has shrunk to approximately 10 years.

The Importance of Going to College to Learn

The key focus of going to college should be to learn, to acquire as much knowledge as possible for leading a stable and prosperous life. If the focus remains on maximizing financial success, a necessary evil that comes with taking on debt, students will continue taking up jobs they are not passionate about in fields that might not interest them – a situation that does not benefit anyone.