Student Loans: The Next Bubble Waiting To Burst

This is a guest piece by Jordan. Enjoy his post about how student loans will wreck the economy!

At some point along the way, high school students became convinced that college was the only option following graduation.  They were also convinced that it was the norm to take out loans to finance their higher education needs, and that this would not have an impact on their futures.  Students have been fed the lie that you need to get a college degree, no matter how much you have to take out in loans.

For this blog, I want to take a look at this tragic misconception and the detrimental  impact it will have on our economy.

It is time we start talking about one of the most crippling financial issues of our time, student loans.  Student loan debt are now the SECOND HIGHEST consumer debt category – only behind mortgage loans.  This is absolutely astounding.

According to Make Lemonade, there are more than 44 million borrowers with more than 1.3 trillion dollars in student loan debt – in the United States alone!

The real question is, why aren’t many people talking about this?

It is a massive problem and could will have debilitating effects on the American people and economy.  I am convinced that this is the next financial bubble that is just waiting to burst, similar to what happened with mortgage crisis and the housing market in 2007.  After all, subprime mortgage lending just surpassed 1.3 trillion before the market crashed in 2007, according to a study published by University of North Carolina at Chapel Hill.

Not all students are capable of paying back their student loans. What a huge surprise!  A whopping 11 percent of student loan debt was default or delinquent in early 2017.  11 percent!! This seems all too familiar to the mortgage crisis where delinquency rates had peaked at 11.5% in 2010.

Unlike mortgage rates, getting rid of college debt is nearly impossible, even in bankruptcy cases.  US student debt holders are becomingly increasingly overwhelmed, because missing just one payment can mess up your credit score pretty badly.

This graph displays a clear picture of just how much student loans add up to now compared to other forms of debt…

Please take note to the incline at which it is climbing.

student loans

Image via Federal Reserve Bank of New York

These numbers SHOULD scare you, and even more than scare you, alert you that this is in fact a problem that is quickly getting worse.  No other form of debt is increasing at the same rate as student loans.

Eventually the student loan defaults could rise to levels we are just simply not capable of sustaining.  More than 3,000 people default on their student loans everyday.  Basically, every economist agrees that this mass amount of debt WILL impact the economy, they just cannot agree to what extent.

The economy is relying on millennials to keep it going, but unfortunately with so much student debt, we will more than likely not be able to do so.  With these high payments, millennials are unable to spend their money on other items, such as buying homes and cars.

Take a look at another concerning metric when talking about student debt…

Student loans are outpacing wages

loans1

Image via Huffington Post

Even as student loan debt is rising to new levels, wages are stagnant.  This makes it even harder to pay back the debts you owe.  Debt payments are quickly eating up a higher percentage of millennials incomes, making it harder for them to put money back into the economy.

We are going to quickly start seeing more people that are unable to pay back their loans and they will begin entering default.  If your loans are federal once you enter default, the government is able to garnish your wage, Social Security Check, your federal tax refund, and even your disability benefits.  If your loans are through private universities, the only remedy is for them to sue you – which is never a good thing.

 

You can clearly see the parallels between what is going on now with student debt and the housing market crash.  While there are differences, the effects could potentially be ultimately the same.  This should worry you. This should spur you into action.  American has a massive problem with loans and debt, and it is time to start working towards a solution.  No one wants to sit dormant and reap the repercussions of another market crash.  The results would be astronomical.

Here are a couple questions to think about.

Who do you think is to blame? Is it the banks for issuing out loans with no limit? All the while knowing many people cannot pay them back.

Or is it the students, for not considering other options to pay for school than just racking up debt?

Or could it be the universities faults, because they continue to increase the price of tuition?

Or would if it is the government’s fault, for taking away state funding to public schools forcing them to drive up tuition?

Most importantly, what are some ideas to combat the debt problem? And how can we avoid an economy crippling crisis?

These are all questions worth considering, as we should be collectively working towards solutions to the debt problem America has.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

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