Student Loans: A Crisis in Waiting?

NEW YORK (MainStreet) — The country may still be grappling with the aftermath of the housing bubble’s burst, but one recent report suggests a different bubble may be looming on the horizon: student loans.

Student lending balances increased by 10% or more each year of the 2000s, driven by increasing enrollments, easy access to loans and the skyrocketing cost of college tuition, according to an analysis of lending data by Moody’s. Even during the recession, when consumers cut back on other loans and general purchases, student loans continued to grow as many students hoped higher education would improve their employment prospects.

“Despite all of the attention that house prices receive, it is noteworthy that even during the housing bubble, real estate appreciation was far exceeded by the growth rate in tuition,” Moody’s explains in the report. “Fears of a bubble in educational spending are not without merit.”

Indeed, tuition costs have increased at a far greater rate than housing, energy and health care costs, as well as the overall rate of inflation. To make matters worse, student enrollment in for-profit schools has increased steadily as well, even though these are typically more expensive. In 2009, just more than 9% of people enrolled in college were at for-profit schools, twice the proportion five years prior.

There was a time when students could enroll in pricier colleges with reasonable assurance that it would pay dividends later on, but while studies show that college continues to be a valuable investment, it’s an investment that will not pay off in the short term for many students because of the difficult job market.

The clearest indication of this newfound difficulty is the state of loan delinquencies. According to Moody’s data, those who took out loans in 2008 make up a greater percentage of the total loan defaults than student loan borrowers from 2007, who in turn make up a greater percentage than 2006 borrowers, hinting that those who entered college during the recession years are more likely to default.

What’s more, Moody’s speculates that “delinquency and failure rates will rise in coming years because many students will be unable to service their loans as income growth falls short of borrowers’ expectations.”

All of this leads Moody’s to conclude that student lending could hurt consumers and the economy as a whole in the future.

On the one hand, students who pursue degrees at pricey colleges and fail to find competitive employment may be encumbered by their loans for decades, making it that much harder to fulfill their other financial obligations and limiting their amount of disposable income. On the other hand, if students choose to pursue less education (or forego college altogether) due to cost concerns, Moody’s speculates that it could make the U.S. economy less competitive on the world stage.

So what’s the prescription for success?

“Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place,” Moody’s writes.

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