There’s been a strong buzz around the media throughout the last year or so surrounding the Student Loan Bubble that’s been brewing for years. Do you remember when banks were lending on real estate to anyone that could practically fog a mirror in the mid 2000s? I bet you do because most of us will never forget it. And do you remember what happened when banks decided to shut the subprime mortgage faucet off? All hell broke loose… That was the subprime mortgage bubble and it’s beginning to look very similar in the world of student loans.
If you’re concerned with the looming Student Loan Bubble you’re not alone. Keep reading…
It’s estimated that there is currently over $1 trillion in outstanding student loan debt. That makes student loan debt the second highest household debt in America next to mortgages. In 2004 student loan debt was only around $240 billion so you can see the significant growth that has occurred over the last decade. Only about $150 billion of the $1 trillion or so owed in student loan debt are privately held by banks and other financial institutions. The other $850 billion or so are federal loans. Are you starting to see the Student Loan Bubble?
The CFPB reported that student loan default is on the rise at around $8 billion worth of private student loans being in default. This number is sure to rise as interest rates rise because most privately held student loans are considered variable rate loans. You can read the latest CFPB Student Loan Report HERE.
While new programs are coming around to help students in need, there are still millions of American families that can’t get help because private financial institutions hold their student loans. The problem is that there just aren’t any flexible repayment plans. Think about this… you take out a large student loan to go to school. You graduate and then you try to find a good job in your field of study. But what if it takes a year or even two? Worse yet, what if you get discouraged and are forced to find a lower paying job doing something entirely different than you went to school for? Those student loans don’t go away. They continue to haunt you and if you fall behind of fail to make your payments they can garnish your wages. Unfortunately, this is a major problem that’s quickly becoming reality for millions of Americans.
Banks are giving in to the Student Loan Bubble.
As bizjournals.com reported, US Bancorp was the first major bank to decide they would no longer participate in student loan lending back in 2012. More recently JP Morgan Chase issued a statement to colleges stating that they would no longer be participating in student loans as of October 2013.
The bottom line is that it’s beginning to look a lot like the subprime mortgage bubble. Wouldn’t you agree? The main question is will this Student Loan Bubble hurt our economy like the subprime mortgage fiasco did? As with anything, lending and programs will evolve with the needs of the students but it’s going to be a long road ahead in the coming years. Currently there are millions of new students taking out student loans every year with no clear and concise plan of how they will repay the debt once they graduate. That in it’s self is a sure way to create a Student Loan Bubble that will inevitably burst very soon.