$600,000 in student debt - Will The Bubble Pop?
Student loan debt is the second largest amount of debt behind mortgages, according to the Fed. Over the past decade, the amount of student loan debt has almost doubled, along with the average balance of graduating college students. A recent article on CNBC covered the story of a 48-year old mother of two admitting to having around $600,000 in outstanding loans (of course, not uncommon, but alarming nonetheless).
According to the article,
“Benson and her ex-husband’s student debt, which started at around $150,000 in the 1990s, has ballooned from interest and late fees”.
Borrowing is unlikely to slow down and the cost of education is only rising. At the same time, the student loan default rate more than doubled between 2003 and 2011, according to Education Department data. Forty percent of student borrowers are expected to default on their loans by 2023, according to the Brookings Institute.
“Cost escalation, which would normally be met with consumer resistance, is being facilitated by the easy availability of credit,” Nassirian said. “It’s disturbingly similar to what happened to tank the mortgage market.” “Predatory colleges target the same low-income populations that the subprime mortgage boom targeted by offering a similar promise of white picket fences and higher education as part of the American middle class dream”..
On the other hand, others say the mechanisms behind student loan debt are dissimilar to what we saw during the housing crisis in 2007-2009. Unlike other forms of debt - notably mortgages and auto loans, the collateral that backs student loan debt is the borrower's future earnings. In addition to this, degrees cannot be bought or sold, there is no real "value" to the degree outside of whatever use the graduate can make of it.
Thoughts? Will the student loan bubble pop? And any advice on current loan payments in general is also welcome.
Obviously, the status quo is unstainable. How its disruption/collapse will play out or how swiftly it will happen is anyone's guess. I'm not an expert on the issue, but as far as I can tell, the government guaranteeing loans to just about any student for any degree has bastardized the supply/demand equation, introducing artificial demand and reducing the incentives for colleges to innovate, be more efficient, or compete on cost. Socially, we need to get away from this idea that everyone should go to college.
I'm a big proponent of community colleges for students who are trying to figure things out because it's much less expensive to drop classes, change majors, etc. Unless someone showed exceptional academic potential in high school, I question the utility of shelling out $25K/year for English 101 mass lecture hall classes when community college is offering them for $2,000 a year and you can transfer to university (like I did) if you do well. In the end, my degree still looks the same as if I'd spent all four years there. And even though I transferred as a junior, I still met tons of people in my major coursework (accounting/business) that I keep in touch with and network with to this day.
Agreed. Unfortunately the liberals dominate higher education and will fiercely fight any proposal to not allow federal student loans to shitty majors/colleges Seriously know so many dumbasses that took Art as their major (not even at an Ivy).... lol good fucking luck.
Nothing will change until shit blows up. I believe what you touched on will be a driving factor though - that is, kids start taking more community college classes; attending trade schools; some colleges lowering pre-req requirements/lower the credits required to obtain a Bachelors (I believe this would require state approval... again, good luck passing something like that in Cali/NY etc)
I have a friend that went into harvard as an econ & math major, hated it and is now an anthropology major. He's still getting interviews to big consulting firms because the assumption is that, if he's at harvard, then he must be smart. Harvard isn't exactly a hard school, but employers don't know that. So with inflated grades and a prestigious name, he's fine. I think a lot of good schools depend on the "shitty majors" precisely for this fact and would be reluctant to halt loans to them. ("shitty majors" used in terms of return on investment here - nothing against the humanities as a subject)
Oh please, like every fucking company on earth doesn't demand five masters degrees and 14 years of experience to get a free internship. Everyone's at fault here.
A lot of kids show up at their university freshman year with no idea what they're doing, because college is the "safe" decision. They screw around for two years, change majors a few times, drop some classes, and drop out with $50K in student debt and three semesters worth of credits. I read somewhere that people who didn't graduate college default at higher rates even though their average debt tends to be lower. It begs the question...why were they there at that price in the first place? Many of them would have likely been happier and more successful going to learn a trade and make money.
Community college was perfect for me. I despised high school, got suspended multiple times, and barely graduated with a 2.3 GPA even though I did very well on all my standardized exams and could have gone to a "target school" if test scores were all that mattered. I was bright, but I hated having to ask someone for permission to use the bathroom when I was 17 years old with an after-school job paying a lot of my own bills. Community college was my "I'll give it a try" approach to college, and it turned out to great because teachers weren't assholes and treated me like an adult. I did well in community college, transferred to my university as a junior and did well there, broke into financial services, and the rest is history.
IMO, at least 25% of freshmen on any given college campus should be in community college instead, and that number is probably closer to 50%. Let kids figure it out for $2,500 a year instead of $25,000.
I'd agree. I personally took a gap year before college to work and the break was the best decision I have ever made. Allowed me to save up money and take the time to research my options.
I also agree that the stigma associated with being non-college educated isn't economically sustainable - trade schools should be societally accepted as perfectly viable options. My issue is really the misinformation and fine print loopholes that colleges manage to get away with - even to those advertised as 'low-loan/meeting full demonstrated need'. I think Navient was recently accused of misleading borrowers. I know it's no surprise to anyone that colleges are just businesses, but in the long run, as millennials continue to accrue more debt and spend less, it's really going to affect the economy.
I do not have any student loan debt anymore, but it’s incredibly wrong to saddle young adults with sizable debt the size of a mortgage when they don’t have proper personal finance knowledge and the advice they’re given is to follow their dreams.
Like the others said, it's pretty fucked up to expect a 17/18 year old to know anything about responsible spending and the vast majority of degrees make 0 sense to spend money on. There are way too many kids in college that would be far better off pursuing a trade.
The TAs I know that taught Financial Accounting at the local state university...three of them are law school graduates attending the school now for a MS in Accounting with $200-$300k debt already in their pockets.
Its insanity. I started at the community college and glad I did. It's a good place where tuition costs are low and allows people to make better choices career wise as well.
In California, I believe there's a big push to make CC free.
I don't think any college should be free. Even if it's like $20 a class, you should have to physically go out of pocket for some amount of your hard earned money to study something. The simple act of doing that is a much better motivator than signing up for free classes. Hell I am motivated more to make use of my $10/month Netflix account than the world's free knowledge at my fingertips at Khan Academy. If Khan Academy charged $0.99 a month then I would probably watch more videos, it's human psychology.
Not only will the student loan bubble pop, there is a broader education bubble that will pop along with it. We as a society have invested trillions into the idea that getting an elite college/grad degree is a safeguard against struggles in life. For the past couple of generations, it's largely delivered on that promise. As that starts to fade, the value of the entire system will be questioned.
As for the loans themselves . . it's beyond obvious that a large % of this debt cannot be repayed, and ultimately I think there will be some renegade bankruptcy judge that starts a trend of discharging this debt. You've no doubt heard the statement that student loan debt is not dischargeable in bankruptcy except in the most extreme circumstances. Fine print alert. I don't know exactly what those extreme circumstances are, but it sounds like the beginnings of a loophole to me. Remember, judges aren't elected. How long before one of them (probably in Socialist Republic of California) applies a slightly looser doctrine and a trend begins.
I'm at a community-college right now. I think it was a good move personally because I really had no idea what I wanted to do (comp sci v finance, took calc 1 and was thankful I got to find out for free that I would hate myself taking math all the way up to Diff eqts), and failed getting into a semi-target school out of high-school so this was a way to give a try again free of charge. Getting an internship was hard as hell, but sometimes in interviews I made out a good story about how I wanted to save money...yadda yadda. Def not a good move though for getting into i-banking or the other careers discussed on this foru, by the time one transfers recruiting is already finished. I believe most other jobs are doing the same.
$600k? Lol oops
I went to a 60k private school and paid 0 in tuition for 4 years because it was actually a selective school and met 100% of financial aid if you weren't well off. All Ivys do this. My school wasn't even close to as selective as an Ivy (~25% acceptance rate) and it could afford to do this, as did all 4 of the private schools I got into.
People with debt loads like this usually went to non-selective private schools, and the way that bubble bursts is enrollment is rapidly dropping at such schools, and more and more of them are going out of business due to lack of paying enrollment.
Edit: additionally, there is no cap to student loans for grad school, so some people have big debt loads for professional schools, i.e. med school, MBA. Does anyone think its actually a problem if you have 200k in loans from, say Chicago Booth, but you make 150 base as a IB associate?
Yup. My bank won't lend a penny to most colleges. Tons of existing colleges that we bank are losing students left and right.
Yep, most of the big debt is happening at larger schools that aren't "low-loan" or "no-loan". My situation was the same as yours - 75k private school, 0 tuition. The problem is they claim to "meet all demonstrated need" but after your first year, can sometimes decrease your aid package. This happened to me - started off at $0 parent contribution and increased to $2000 the next semester with no family income change...how sway??? Definitely something to look out for.
There was a WSJ article on this back in May 2018. I would say as mentioned by a few prior, large schools that charge high tuitions for all majors, regardless of if they are in demand or not.
Personally, I had roughly 60K in student loans and chose to get an MSF because 1) I got into a good school with good network and 2) Even though I was adding probably 45K in student loans it deferred payments when quite frankly the other option was running the risk of defaulting.
Granted it worked out and I secured a strong position but it truly is about the grind and hustle to secure a position while in that advanced degree whether that be MSF, MBA, Law, Dental, etc.
https://www.wsj.com/articles/mike-meru-has-1-million-in-student-loans-h…
All comments in this thread are valid. I also went from a community college to a state school and if I had to do it again, sure I would've went to my state for 4 years, but I also changed my major twice in my CC and goofed around a lot for a LOT less.
One thing I can't understand is how students will go to a state school/private school, get a degree in something odd such as zoology or anthropology, graduate with say 50-70k in debt and then wonder why they can't get a job in their field....
Maybe this bothers me since we here on WSO understand Finance, Econ, Accounting, History, etc.. degrees are quite useful and transition into the world, but also maybe this is because most students who enter college really aren't ready to make such life decisions. Oh well.
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