Student Loans: Today’s Financial Time Bomb

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Student Loans: Today’s Financial Time Bomb

Perhaps the most important factor in winning the jobs war is building human capital.  Human capital is defined by the quantity, age, gender, education, experience, and attitudes of those who make up the workforce.  The characteristics that we can tweak at this point are limited to education, experience, and attitudes; and of these, education has the highest leverage.

America’s universities have done a great job of maximizing the capabilities of the top 5 to 10 percent, but that’s not good enough to win the jobs war.  Standardized tests say we’ve done a poor job of getting the average American ready for the 21st century job market.  Worse yet, we’ve invested trillions in this endeavor and the resulting student loans have only bought us a new financial bubble waiting to explode. 

The warning signs of a financial bubble are certainly there, including: 

  • Cheap money
  • Loans that nearly anyone can get

The signs of an impending burst are emerging as well, including:

  • Widespread inability to make payments on student loans
  • Rising defaults and downgrades for some student loan asset-backed securities

These factors bring back unpleasant memories of the recent housing bust, complete with growing numbers of Americans going bankrupt.

Just how bad is it?  Here are some numbers to consider.1, 2, 3

  • The average cost of tuition has soared 440 percent in the last 25 years; that’s more than four times the rate of inflation. 
  • Unable to keep up with rising costs, students have increasingly turned to loans.  In 2010, student borrowing surpassed the $100 billion mark.
  • In 2011, total outstanding loans exceeded $1 trillion, surpassing credit card debt for the first time.
  • Graduating college seniors in 2010 owed, on average, $25,250.  That was a 5 percent increase from 2009.
  • College loans that parents owe on behalf of their children have jumped 75 percent since the 2005-2006 school year.
  • These parents, on average, owe $34,000 in student loans for their children in a climate of stagnating wages.
  • College graduates from the class of 2010 were reportedly unemployed at a rate of 9.1 percent

This final statistic has contributed to a growing crisis; 80 percent of bankruptcy attorneys say that in the past three to four years, potential clients with student loan debt have increased “significantly” or “somewhat.”

Another analysis reported that of borrowers from the Class of 2005, 25 percent became delinquent at some point and 15 percent defaulted...

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