(Photo: Flickr / jjinsf94115)
Signs: The voice of the people at the Occupy SF weekly march through downtown San Francisco on Oct. 15, 2011. This march was part of a global day of action.
Student debt is growing at an alarming rate. At the end of 2011, total student loan debt crossed the $1 trillion mark, a level that is higher than the sum of all credit card debt in the United States. Already, this category of debt has been likened to the subprime crisis, raising worries that a potential delinquency crisis could find its way into the wider economy.
Unlike other forms of consumer credit products, student debt has been growing at a steady rate. In 2011, American students borrowed $117 billion in federal student loans alone, and student borrowers, including those who have not left school, are unable to keep up with interest payments.
A study by the National Postsecondary Student Aid reveals that two-thirds of college students borrow to pay for college, and the average debt burden is almost $24,000 by the time they graduate. Over 10 percent of students from public schools default on their debt within three years after college, and that number almost doubles for students from private institutions.
In addition, unemployment rate for 20 to 24 year-olds is nearly 14 percent, higher than the national rate of 8.3 percent - compromising the ability of graduates to pay off their growing debts.
Since 1978, the price of tuition at U.S. colleges has increased over 900 percent, 650 points above inflation, while tuition grants have been slashed from 70 percent to 34 percent. Student debt, on the other hand, has increased 511 percent since 1999, a rate that is twice as steep as the growth of housing-related debt.
In February, an interesting anecdote came out of the Fed Chairman Ben Bernanke's semi-annual testimony to Congress: His son, who is in medical school in New York, is likely to rack up $400,000 in student loan debt in the process of getting his degree.
Warning of the rapid growth in U.S. student loan debt, Bernanke called for 'careful oversight' from regulators.
Student Loan Debt Likened To Housing Bubble, But Is It A Bubble Yet?
To call something a bubble, it must be overpriced and there must be an intense belief in its value. Economic bubbles are formed when its cost grows out of proportion with its real or intrinsic value. When the returns and pay offs inevitably decline, that's when the bubble bursts.
See Infographic: Is Higher Education the Next Big Bubble?, and Part Two
Some analysts have compared the potential impact of a steep rise in student loan delinquencies to the subprime housing crisis, in which the rise in defaults and toxic mortgages cascaded into the wider economy.
Just like tech stocks in the 90s and recent housing bubble, existing data indicates that a bubble may have already formed, given the rise in tuition fees, unsustainable and growing debt, and persistently high youth unemployment rate.
According to the Financial Times, the criteria for federally guaranteed student loans are not as stringent as for other kinds of debt, and many loans have already been securitised and sold off to investors.
In a 2011 report, credit ratings agency Moody's said:
The long-run outlook for student lending and borrowers remains worrisome. Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the broader market.
But the student loan debt crisis is not expected to achieve the same level of carnage as the subprime crisis. At $1 trillion, the debt pile is relatively smaller than the estimated $2.6 trillion in risky subprime loans.
Mark Zandi, chief economist at Moody's Analytics, believes that there would be higher delinquency and loss rates on loans as graduates enter a difficult economic environment, but he also offers some hope: He doesn't think it's a subprime crisis.
Jordan Weissmann, calling it a symptom of a malfunctioning education system, agrees:
The student debt crisis isn't like other debt crises. It won't sink a currency, like Europe's sovereign debt crises. And it won't suddenly topple the U.S. economy, like the mortgage crisis. But give this crisis enough time, and it might just drag down the middle class.
But why is college so expensive? Continue reading...
The Education Premium
According to estimates from non-profit group The College Board, tuition at public two-year colleges in the United States cost about $3,000 a year on average in the 2011 academic year, compared to $28,500 a year for a four-year private education.
At the same time, federal and state governments are subsidising less in tuition grants, and students end up paying more to make up the difference.
Andrew Gillen and Jon Robe, researchers with the Centre for College Affordability and Productivity offer an explanation for the rising cost of college. At an interview with the Wall Street Journal, they said:
The fundamental problem is that we reward colleges for spending money, so the more money a college spends, the better professors it has, the better students it can recruit, the better facilities it has, it moves up in the rankings. This is all very good from the college's perspective. So they want to spend as much money as possible, and one of the ways they get money is by charging their students tuition.
Richard Vedder, professor of economics at Ohio University, agrees with their findings. Vedder, who also heads the Centre, adds that the more government aid goes up, the more tuition rises.To fix that, he says incentives need to be changed and innovation be encouraged.
Is education still a worthy investment?
Peter Thiel is a man with an extensive résumé. The 44 year-old German-born American billionaire is a Paypal co-founder, an early investor of Facebook, as well as president of Clarium Capital, a hedge-fund with more than $700 million in assets under management.
In April 2011, Thiel was amongst the first few to highlight the growing problem of student loan debt. In his words, he described higher education as a 'giant selection mechanism' and estimates that only 10 percent of the value of a college degree comes from actual learning. Another 50 percent, Thiel reckons, comes from getting through the selection process, while the final 40 percent comes from signalling to employers the face-value of a brand-name college degree.
He could be right. But still, some economists are saying higher education remains a worthy investment, given the widening income gap between a degree and non-degree holder. In the spirit of optimism, economists say the higher income will in time offset the high costs of a college degree.
The most practical compromise, it seems, is to pick colleges based on their relative cost-to-rewards ratio. Rather than insist on attending a brand-name college, students should instead pick schools where the payoffs from higher salaries upon graduation exceed the cost of education by the widest margin, especially when the job market contracts.
For now, it is not entirely clear what the lasting implications of this ballooning debt will be.However, economists have suggested that high student debt combined with a weak job market has already added pressure onto the broader economy, and will have an impact on future growth.
Rohit Chopra of the Consumer Financial Protection Bureau said:
Young consumers are shouldering much of the punishment in the form of substantial student loan bills for doing exactly what they were told would be the key to a better life. Large levels of debt might also pose immediate problems for the rest of us. Excessive student debt can slow the recovery of the housing market. Student loan borrowers are sending big payments every month to their loan servicers, rather than becoming first-time homebuyers. This debt can also put added stress on the borrowing capacity of the household and government sector.
John Rao, an attorney with the National Consumer Law Centre, is working on a restoration of the bankruptcy discharge for student loans, and setting a reasonable statute of limitations for student loans. He said:
Even in the best of economic times, when jobs are plentiful, young people with considerable debt burdens end up delaying life cycle events such as buying a car, purchasing a home, getting married and having children.
Related Infographic: Obama's New Plan For Student Loans
A new report IHS Global Insight confirms that young adults are indeed delaying key rites of passage typically associated with adulthood.In 2007, the median age of a first marriage for males was 27.5 years old, and for females, 25.6 years old, according to IHS. But by 2011 it crept up to 28.7 and 26.5, respectively. Fertility rates, defined as births per 1,000 women aged 15-44, decreased significantly from 69.3 in 2007 to just below 65 last year.
And so it seems, that when the time comes, Bernanke Junior might be in a better position compared with the average graduate to pay off his student loans, to get married and have kids, if he so wishes.
But with all the necessary tell-tale signs already on full display, it is only a matter of time before this ticking time bomb goes off.
The article was first published at the EconomyWatch.com, where Michele Lin is a regular contributor.
The article was first published by Economy Watch.