Will Student Loans Cause the Next Debt Crisis?

The American economy has been in rough shape for some time. The 2007 collapse of the housing market made for the sort of drastic event that put the entire world into a tailspin, with the financial industry falling to crisis and calling for billions in bailouts while the housing market on the whole crashed and U.S. homeowners lost some $6.4 trillion in value in less than half a decade. At the core of this market correction was the wild sub-prime mortgage market.

When it became clear that levels of debt being issued had reached unsustainable levels, a massive crash followed. Elsewhere, similar realizations about levels of sovereign debt in Europe have left the entire continent scrambling to prevent a similarly disastrous crash.

Presently, the rebounding labor market has given rise to optimism that the long dark tunnel of a sluggish economy might finally be nearing its end, while the most recent Case-Shiller numbers have some predicting that the housing market has bottomed out and may begin to start recovering. However, could there be another credit bubble around the corner? Millions of Americans are currently carrying massive amounts of student debt, much of it taken on during better times when college students could look forward to a brighter future and a better labor market. Is it possible that this student loan industry is going to be the source of another credit bubble?

Student Loans Represent Large Portion of Nation’s Debt

A new study from IHS Global Insight observes that, while all other forms of debt have been on the decline since 2007 while Americans tightened their belts during tough times, student loans have continued to rise. Just last year, American college students borrowed $117 billion and, while the average level of debt was $12,800, the top 1 percent owe more than $150,000, giving a whole new meaning to “the 1 percent.” In total, Americans now owe more than $1 trillion in student loans, with 67 percent of those borrowers being under the age of 40 and 40 percent younger than 30. What’s more, the figure is growing by $50 billion to $60 billion each month and over a quarter of these loans are now delinquent.

The Obama administration has tried to take steps to alleviate some of these issues, forgiving all student loans after 20 years, down from the 25 years that was previously the rule, and changing the rules about which for-profit institutions could participate in the federal student loan program. However, these efforts might ultimately mean little if the economy’s current direction doesn’t change. As of last September, only 46 percent of Americans aged 16-24 were employed, representing an unemployment rate of 18 percent.

House and Senate Republicans announced Tuesday that they planned to investigate the government’s student loan program to determine if the Education Department was doing its job.

“We are increasingly concerned the department may not be appropriately managing student debt, particularly when helping borrowers who have defaulted on their loan payments,” it said in a letter to the GAO signed by six Republicans.

Michigan Democratic Congressman Hansen Clarke has an alternate proposal: simply forgiving student debt entirely, introducing a bill on March 8th to that effect.

“This bill provides that if a student loan borrower makes payments equal to 10 percent of their discretionary income for a period of ten years, the balance of their federal student loan debt will be forgiven,” Clarke stated while introducing his bill.

Is College Still a Sound Investment?

At the core of this issue is a bigger questions about the direction of the American economy. The shift to a service-based economy means that this generation’s young men and women face a labor market with a death of opportunities in traditional blue-collar sectors. As manufacturing jobs continue to disappear, the wage gap between earners with a college degree as compared to those without continues to grow. Even as student loan debts continue to grow, college still seems to be an almost necessary investment for young people seeking a professional career.

The rising cost of a college education and career may also change the foundation of the American economy in key ways. While increased wages that come along with a college degree may mean that most Americans will ultimately be able to pay off their student loans, it also means that major milestones like getting married, buying a first car, or buying a first house will come later and later in the lives of an average American.

“Student loans are concentrated among young people—a particular group that may be prone to buy a new house, a new car, and get married,” says Chris Christopher, senior economist at IHS Global Insight. “They are not spread out among all age cohorts in the economy.”

Future of Student Debt Murky

Whether or not student loans will erupt into a full-blown debt crisis is difficult to see for sure. The loans are largely made through the Federal Government, and the increased earning power that comes with a college degree should mean that most of these debts are unlikely to default. However, the downturn in the labor market has created a difficult situation where college graduates are finding themselves competing with older, more experienced job-seekers for fewer jobs. While it’s impossible to say for sure what the future holds, it’s not a stretch to suggest that unless the job market continues to improve for the nation’s young people the issue of student loans will continue to become more visible throughout the country.