Is There A Looming Student Loan Debt Crisis? (Part One)

At this point, everyone has heard about the housing crisis that strongly influenced our most recent recession. Property values increased greatly, incentivizing people to buy (and build) homes in hopes they could “flip” them for a profit. The crisis happened when the bubble burst – too many homes resulted in values dropped significantly. People quit buying homes and as a result, a lot of new homeowners ended up with houses that were worth less than they had been purchased for. In addition, the economy caused a lot of people to lose their source of income. High payments coupled with lower incomes caused massive numbers of foreclosures. Five years after the housing bubble burst, home prices are still dropping.

There were three main trends in the housing crisis:

• Too many homes. 
• Too much debt. 
• A drop in home values.

Could the same thing happen with student loans (replacing houses with college degrees)? Surely not, I mean, it’s college! Of course college is worth whatever the cost is. Or is it? For a student loan bubble to occur, the same trends would have to be in place.

The number of college graduates is increasing relative to the population and continues to increase. More high school graduates go straight to college than ever before. The data in the chart only goes to 2003 and the trend has become more pronounced. In 2012, more than 30% of adults 25 and older had Bachelor's degrees for the first time ever. More college graduates is very good for society in several ways. But, it means more competition for jobs requiring college degrees. Your Bachelor's degree isn't doing much for you if you're up against 40 other people with the same degree applying for the same position.

What about debt? Everyone knows that tuition and fees are increasing at a blinding pace. How bad is it? Since 1990, prices have increased an average of 75% for most items. Healthcare costs, another hot topic, have increased about 150%. Tuition and fees have increased 300%. 300% in twenty years and it’s growing exponentially!

Naturally, this has resulted in much higher debt loads for students; if you pay more and more each semester, your total debt will be higher at the end. Also, because of accruing interest, the total payments made will be (significantly) more than the amount originally borrowed. To show this, let’s use Georgia Southern as an example. Students entering in Fall 2008 were guaranteed the same tuition every semester they enrolled. This luxury ended with students entering Fall 2009 and later. If a student entering Fall 2008 paid in-state tuition and borrowed the exact amount needed to pay for tuition and fees each fall and spring semester for four years, their total debt would be $21,999 at graduation (assume standard Stafford Loans with interest of 6.8%). If this loan was paid off in ten years (standard repayment period), the monthly payment would be $253, totaling $30,380 over ten years. The same student entering Fall 2009 would owe $29,135 at graduation. The monthly payments would be $335, totaling $40,234 over ten years. What a difference higher tuition makes – almost $10,000 over the lifetime of a loan!

Keep in mind this is in-state tuition at Georgia Southern, one of the most affordable colleges in the country. Imagine the debt loads at private colleges or public colleges in states not known for affordable college education. While costs have been rising sharply, financial aid has not been kept up. In my next blog post, we will look at the benefit of a college education and put everything together to examine just how a student loan bubble might occur.


Landon J. Latham
Career Educator