Student Loan Debt: The Next Crisis?

Thinking of applying for a student loan? Well you might want to think twice before doing so.

Last Wednesday, Jill Schlesinger at CBS News reported that student loan debt is nearing $1 trillion (!) : 

 Outstanding student loan debt now stands at $956 billion, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit. Student debt increased by 4.6 percent in the third quarter from the previous quarter — when annualized, that’s almost a 20 percent rate of increase.

The graph below highlights the problem: (h/t Matthew Ferrara)

That’s an awful lot of money that needs to be paid back. And the stories involving student debt are rather heartbreaking. What caused all of this debt to be accumulated in the first place?

The Job Market

For starters, in this rough economy jobs aren’t exactly easy to find. Especially for us college students.

In some cases, students obtain a degree that frankly does butkus for finding a job. For instance, the Nutrition major. Hey don’t get offended Nutrition majors, I’m all for eating nutritional foods, even though I’m eating a bag of M&Ms while writing this. However it does suck that most jobs involving nutrition don’t make much of a profit.

There are also other costs involved with going to college rather than tuition, including meals, school supplies, and housing. Eventually, especially in a struggling economy, those costs start to add up.

The Government’s Loan Program

And then there’s the federal government’s student loan program, the biggest driver of the student debt. According to the CBS article I linked to at the beginning of the post, the federal government accounts for most of the student loans. This is because anyone can get a student loan, regardless of how likely they are to pay it back. So that means students that are incapable of paying back loans receive loans anyway- and since it’s through the federal government, you and I are the ones who are owed the money. This will only worsen since ObamaCare has basically nationalized the student loan program.

Wow a healthcare bill that put the federal government in charge of student loans? I wonder what else is buried in that 2700 page monstrosity. Too bad nobody who voted for it knows!

But I digress. All of this massive student loan debt ultimately has two negative effects.

  • One, students graduate college with these massive amounts of debt, causing them to be unable to spend money on other things, resulting in less overall demand.
  • Two, they result in massive tuition increases. Because of the student loan program, more money is available for students to pay for college. Let’s go back to basic economics. Naturally, when more people are paying for college, demand increases. When demand increases at a fixed supply (public schools = fixed supply since they’re nonprofits), prices increase!

The Public University Dilemma 

Normally when there’s increased demand in the private sector, some of the extra money goes to stockholders and investors. But that doesn’t exist with public universities. So instead the university uses the extra money for other purposes, like maybe adding a better TV to an on-campus restaurant. That may sound good, but then the cost of the new TV is added to the college tuition. And so on. So it’s not all that surprising to see that colleges that receive federal aid cost 75% than those that don’t, and that the National Bureau of Economic Research found a direct correlation between student loans and higher tuition. Overall, after adjusting for inflation, the cost of college has increased by 439% since 1982.

The Education Bubble

This is creating what’s known as the education bubble. A bubble, in economic terms, is defined as when prices in a particular sector rise so high that eventually the prices crash back down, resulting in an economic slump.

So in this case, if the status quo is maintained or accelerated, eventually college tuition will rise so high to the point where students won’t be able to afford to pay for college anymore, resulting in a such a massive decrease in demand that college tuition will be extremely low. While that sounds hunky dory, tuition at too low of a price results in universities being unable to afford too many important resources and will have to downsize.

What Should The Government Do?

So. This is where we are headed. Sounds swell doesn’t it? Because after all thanks to the student loan program, everyone can go to college, right?

But at what cost?

The question then becomes what do we do from here? Well, as for what should be done politically, the best thing to do is to privatize the student loan program, with a safety net provided by state/local governments. Clearly, the student loan bubble was created by government distortion, so it makes sense to shift it back to the private sector, which takes risk of default into account. But this won’t happen anytime soon given that too many politicians want to maintain or accelerate the status quo.

I know that President Obama’s executive order forgives student loans after 20 years, but that doesn’t do anything stem inflating tuition and it allows for people to game the system, take a loan and just not pay it back knowing they’ll be forgiven of debt in 20 years. And we the taxpayers will be on the hook for that.

What Can We Do?

So what you can do is not take a student loan unless all other options have been exhausted. If you can’t afford the college of your choice, there are always scholarships and grants. You could choose to go to a less expensive school that has the same quality of education, or you could go to a community college and in the meantime save up for the college of your choice. Or you could work to pay for the college of your choice!

I know the above options are not ideal. But the alternative is certainly not ideal by any means.

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Aaron Bandler

Aaron Bandler

Aaron Bandler is a sophomore at California Polytechnic State University San Luis Obispo pursuing a Journalism major and an Economics minor. Aaron's main passion is politics. As a staunch conservative Republican, he advocates for conservatism every day of his life. Aaron is also an avid sports fan who passionately follows the San Francisco Giants and 49ers. Outside of sports and politics, Aaron enjoys playing guitar and listening to classic rock music like The Who and Led Zeppelin as well as hanging out with family and friends.
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