Student Loans Could Be the Next Bubble to Burst: Debt from Student Loans Exceeds $1 Trillion

Student Loans Could Be the Next Housing Bubble: Robert Reich

March 30, 2012

Daily Ticker - Could the next bubble to burst be student loans?

The burden is big: U.S. college students borrowed $117 billion in federal student loans last year, and the Consumer Financial Protection Bureau reported earlier this year that debt from student loans exceeds $1 trillion, surpassing credit card debt for the first time.

Tuition and fees at both public and private universities have been steadily increasing and some higher education institutions are cutting financial aid, reducing class offerings or even freezing enrollment at campuses because of state and federal funding shortfalls. California State University, for example, announced in March that it was not accepting new students at 15 of its 23 campuses for the spring 2013 semester and will wait-list all applicants the following Fall after a $750 million funding cut.

President Obama wants to overhaul the college education system and proposed a new financial aid program during his State of the Union address in January, saying higher education isn't a luxury. Rather, Obama says "It's an economic imperative that every family in America should be able to afford." In a recent speech at the University of Michigan, he told students that colleges were being put on notice. At the heart of the problem: "If you can't stop tuition from going up, then the funding you get from taxpayers each year will go down," he says.

According to an analysis by Moody's Analytics, student loans have grown "persistently at double digit-rates throughout the last decade" and "college costs have outpaced overall inflation by a significant margin." A new report by PNC Bank finds that students hold an average of $45,000 in student loan debt.

Robert Reich, a public policy professor at University of California Berkeley and the labor secretary in the Clinton administration, says a four-degree would mean a 70 percent to 100 percent increase in salary compared to someone with just a high school diploma. Students would leave college with thousands of dollars in student loans, but the higher salary would make up for the monthly payments. However, now college students are "facing very dim employment prospects" and "people will be struggling with college costs" for a long time, Reich says in an interview with The Daily Ticker.

The plight of college grads has been well documented in the media. There are the Harvard-educated 22-year-olds who are working as Starbucks baristas. Or the liberal-arts grad taking a second unpaid internship. The Phi Beta Kappa member working in retail sales. There are similar stories like these around the country. Even for students lucky enough to find a full-time job after graduating, many are low paying and more often than not exclude previous guaranteed perks like health insurance or a 401k plan. The cost of student education has shifted to the federal government as students and families seek out additional scholarship aid to help pay more soaring college costs. Some families would take out second mortgages on their homes to pay for college tuition, but many families can no longer do that in the face of high unemployment, a weak housing market, tighter credit and an overall uncertain economic climate.

Pell Grants and Stafford loans, scholarship money awarded by the federal government to lower-income students, have not kept pace with the cost of tuition despite the Obama administration advocating for increases in the maximum Pell Grant award. Republicans, who have made unprecedented cuts to education in their budget proposals, have targeted federal education assistance for years. Federal education aid has "become a kind of political football," Reich says.

Online education, a growing trend that an increasing number of private and public institutions have embraced, could be one way to lower the burden of college costs for students. Technical schools are another point of interest: in Germany, students with a technical degree are making as much as students who have completed four years of higher education, Reich says.

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