Can the Student Debt Crisis Outshine the Housing Bubble?

NEW YORK (MainStreet) —It is a crisis looming on the horizon. Indeed, the possibility of massive defaults of student loans may be this decade’s financial crisis. Some say it would rival the housing bubble and the bubble in terms of its effect on the national economy.

That's a major fear for Lindsey Burke, the Will Skillman Fellow in Education Policy at the Heritage Foundation in Washington, D.C. Student loan debt now exceeds credit card debt, and too often, students are financing degrees that don’t pay off in the long run.

Burke also noted that online courses are putting tremendous pressure on the traditional university system. Access to information is becoming radically cheaper, while the cost of college continues to increase at unsustainable rates. She said this will cause the bubble to burst.

But not everyone is ready to sound the alarm. Neal P. McCluskey, the Associate Director, Center for Educational Freedom at the Cato Institute, Washington D.C. feels there's much ado about nothing and minimized the danger of the potential economic drain.

“I’m not sure that there is good evidence that this decade’s financial crisis will be huge defaults on college loans," McCluskey said.

McCluskey believes that it costs far too much to attend college. He attributes this, in large part, to the federal student aid that enables colleges to increase their tuition rates in excess of the inflation rate.

“But average debt for graduates with debt is around $27,000, which is small compared to mortgage debt," McCluskey said. "For students going to good schools and pursuing in-demand degrees, it should not be hard to pay off.”

According to McCluskey, the student debt issue pales in comparison to the mortgage bubble. The amount owed is not nearly what was owed in mortgages and defaults will not have the economic effect.

But that opinion does not withstand close scrutiny. There are a few reasons why: