Is the Student Loan Debt Bubble Ready to Burst?

Posted on May 17th, 2012

student loan debt

**Today’s guest post is contributed by Harry Campbell.**

This spring, more than 1 million new graduates will be thrust into the work force. And according to a recently published Rutger’s study, more may come out of school with debt than come out with jobs. Today’s graduates face the perfect storm of a weak job market combined with an overly saturated applicant pool. There was a time when a college degree held significant value and graduates would be inundated with job offers. That time has passed, and now there looms a bigger problem.

We all know the cost of college is skyrocketing. Public and even private schools have increased their tuitions at a pace that severely eclipses inflation. Since 1981, the price of tuition at US colleges has increased 6.4% annually, more than double that of inflation. These unsustainable tuitions are afforded, in large part, by student loans. Student loan debt has now grown to over $1 trillion, surpassing even credit card and auto debt. Universities are responding to budget cuts by increasing tuition and students are taking out more and more debt in order to finance this whole operation.

Signs of a Bubble

During the housing bubble, cheap money was made available to people who had no business owning properties. Banks were even making up investment options like interest only mortgages to entice borrowers. Eventually the market could not support rising house prices and the housing bubble burst. Similarly, the price of college will continue to rise until the market revolts. But unfortunately for students, student loan debt cannot be discharged in bankruptcy court and social security payments can even be garnished to pay off student debt.

Currently, there is almost no underwriting on student loans. 17-year-old high school students and their parents are being allowed over and over to determine what level of financial burden they can take on. So far, students have seemed willing to shoulder tremendous amounts of debt in order to pursue the college of their dreams. In fact, 1 in 5 students from the Rutger’s survey actually deferred their student loans by going to graduate school and taking on more debt! The point of all this is that getting a student loan has become too easy.

A Presidential Debate

Mitt Romney and President Obama have recently come to the defense of student loans, asking congress to maintain the current low rate of 3.4% on new Stafford loans for another year. With so many young professionals struggling to pay off debt, this seems like a no brainer, right?

However, we need more than a 1 year or temporary fix. Government budgets are cutting more and more from public education, and in response, universities are raising their tuitions and in turn raising student debt. Given the current job market, many students from the Rutgers survey indicate they would actually choose a different major if they could do it all over again. Nearly half of them were actually working at jobs that didn’t even require a college degree.

Is College for Everyone?

I think too much emphasis is being placed on going to college these days. I don’t think it’s a good investment to go into $100,000 of debt to get a humanities or fine arts degree from a mid-level university. From a financial stand point, this is a bad investment. Unfortunately, the government is making lots of bad investments with student loans.

The government needs to focus their efforts on awareness. As the study above showed, upon entering a stale job market, many students wish they could go back and change majors. Does a 3.4% or 6.8% interest rate really make much of a difference when you’re working a minimum wage job and saddled with $100,000 of debt? My solution is to force colleges to show true rates of employment and pay by major right next to yearly tuition. I think a lot of students would make different choices given this information.

The real question here isn’t whether the student loan debt bubble will pop, but when? Prospective parents of college students should not ignore common sense in obtaining a degree. People used to say you can’t put a price on education, but that axiom no longer holds true. The cost of college is becoming more and more ludicrous and student loans are only allowing the madness to continue.

Discussion Questions: Do you think student loan debt is a problem? Should student loans be looked at more like an investment or do you think our current setup is acceptable?

Harry Campbell is the founder of Your Personal Finance Pro; he lives and works as an Aerospace Engineer in San Diego, CA. Harry started his blog in January of 2012 and writes about real estate and personal financial advice for young professionals.

Opinions expressed are solely those of the author and do not necessarily reflect the opinions of CreditKarma.com or its founders.

Filed under News & Trends, Op-Ed, Students & Money, college costs, debt, student debt, student loan debt, student loan debt bubble, tuition costs | No Comments »

How Student Loan Delinquency Affects Your Credit

Posted on April 3rd, 2012

student loans

Student loans are in the spotlight now more than ever. A new report shows that the outstanding student loan debt balance for U.S. consumers is approximately $870 billion, surpassing the nation’s total credit card debt ($693 billion) and auto loan debt ($730 billion).

Of the 37 million student loan borrowers owing on average $23,300 each, 27 percent of them had past due balances in the third quarter of 2011. And that delinquent number could get worse if the College Cost Reduction and Access Act of 2007 isn’t extended. This law originally reduced the interest rates on subsidized Stafford loans from 2007’s 6.8 percent rate to today’s current 3.4 percent, and is set to expire in July 1, 2012. Students and advocates are already rallying against the impending interest rate raise, but unless Congress decides to extend the current rate, they’ll be out of luck come July 1, when interest rates reset to the higher rate and threaten even more student loan debt.

Struggling with higher debt loads, impending boosted interest rates and increased delinquencies, student loans could hurt borrowers where it hurts in the long-term: their credit scores. How can late payments affect your credit? We’ve compiled a quick list to show you the impact of loans on your credit.

How student loan debt affects your credit

Diversity of credit. Having a student loan in your credit line-up is a great way to show that you can manage multiple types of credit. Student loans are installment loans, while credit cards are revolving credit. Your student loan will help build your credit over time and populate your credit history in a positive way, as long as you make timely payments.

Percent of on-time payments. When it comes to your credit score, this percentage tells creditors how often you make loan payments on time. Since it’s a heavily weighted factor in calculating your credit score, just one or two late payments can significantly affect your score. Conversely, a record of flawless on-time payments goes a long way to boost your score. Read more about how late payments affect your credit.

Accounts in collections. If you’ve failed to make your student loan payments for at least a year, your lender will consider you defaulted and can send your debt to a collection agency. Having an account in collections will show up on your credit report and significantly impact your credit score. For instance, according to Credit Karma’s Credit Simulator, an account in collections dropped a good credit score of 742 a whopping 77 points to 665.

Wage garnishment. Once your student loan is with a collections agency, the collector is legally allowed to deduct a percentage of your wages to be put toward your student loan balance. For federal loans, your wages could be garnished up to 15 percent. For private loans, it varies from state to state, but they could be garnished as much as 25 percent. What’s more, the wage garnishment will be reported to the credit bureaus as a public record, and your credit score will be negatively affected. To see how your credit score might be affected by wage garnishment, visit the Credit Simulator.

Bankruptcy. It’s very difficult to get a student loan discharged in a bankruptcy. In order to do so, you have to prove that you’re experiencing “undue hardship.” Not having enough income to make your monthly loan payments is not considered undue hardship, unfortunately. Even if you manage to discharge your student loans in bankruptcy, you’ll be dealing with one of the worst financial situations to impact your credit. A bankruptcy can remain on your credit report for up to ten years, making it difficult for you to gain access to other credit lines in the meantime since many lenders have “bankruptcy filters” in their underwriting. Bankruptcy is typically a last-resort measure.

Bottom Line: Before you become delinquent on a student loan, know that you have some debt repayment options that might work for you. Check out this articl for more information. If you already have a default on your credit report, you might be able to take advantage of the Higher Education Opportunity Act, which helps borrowers with federally backed loans get one-time default relief. This article outlines the process. Lastly, if you feel that your student loan repayment or rates are unfair, make your voice heard. The CFPB is now taking student loan complaints; all you have to do is fill out the online form.

Have a Karmic Day!

Bethy Hardeman, Social Media Maven