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Wednesday, July 3, 2013

The next hazardous economic bubble is student loans

Student loan debt is an economic burden
Rising student loan debt places restricts consumer spending
 By Wesley Francis

Just like the financial crisis that befell this country as a result of the burst of the housing asset bubble and the glut of toxic assets clogging the balance sheets of many banks and financial institutions, it appears that the mounting student debt is about to create a secondary economic crisis, and it is coming soon.

The seriousness of this issue was addressed by President Barack Obama in a May 31, 2013 Rose Garden event where he warned Congress that inaction over the dramatic rise in current student loan interest rates from 3.4 percent to 6.8 percent on July 1, 2013 will have grave consequences on the ability of families to send their children to college and on students to pay back their loans without creating a collapse similar to the crisis of 2008-2009.

The president is asking Congress to peg student loan rates to the rate at which the Federal government borrows (currently around 2 percent) while some members of Congress want to see the market set those rates for student loans with a 2.5 percent kicker, up to a maximum borrowing rate of 8.5 percent. The stand off may prove costly to current and perspective students and their families, and it's likely to create a situation where some may have to forego a college education.

Current student debt level

The current level of student loan debt in the United States is close to $1 trillion, according to the Federal Reserve Bank of New York data, surpassing both the credit card loan debt and auto loan debt. The number of borrowers has grown 66.5 percent from 2005 to 2012, from 23.3 million to 38.8 million. Student loan delinquency rates, which are nearing 12 percent, are higher than those of auto, credit card, and mortgage loan delinquencies (those with non-payment for a period of 90 days or more).

The fixes

As the cost of education continues to outpace inflation, growing at 4.8 percent for public universities in the 2012-2013 academic year versus the rate of COLA (cost of living adjustment, standard measure of inflation on the price of goods and services), which rose 2 percent for the same period, the fixes being offered only propose a temporary moratorium on the troubling problem of mounting student debt. Students will be entering the workforce with an average debt of nearly $25,000 are faced with the prospect of taking jobs that may pay less in order to address their debt situation and forego purchasing a home or starting a family. This will further reduce the tax base, which will have a decided impact on other aspects of the economy.

Practical and sustainable solutions needed

What will probably occur, in terms of addressing the issue of mounting student loan debt, will result in a short-term fix to a long-term problem. Congress, the White House, colleges, and universities across the country need to enter into a discussion on the rising cost of education and how to make it affordable and accessible for everyone, not just a select few.

About the author: This article was written by Wesley Francis, a retired financial advisor and accountant. Wesley is now a blogger and loves to help people with important financial decisions. For more information on important financial decisions, like personal bankruptcy for example, Wesley recommends consulting professionals. 

Image attribution: Carine06; CC BY-SA 2.0