The Student Loan Bubble

Call it a bubble, call it a catastrophe, call it whatever you’d like, but student loan debt has become an increasingly large burden and more and more people are starting to notice. The issue was most recently highlighted by our largely stagnant Congress who allowed the subsidized loan rates for undergraduates to double to 6.8% because they were unable to agree on how to keep it at 3.4%.1 With student loan debt now topping $1 trillion,2 young Americans have been effectively barred from investing in other areas of the economy, the hardest hit sectors being home ownership, savings, and retirement investments.3 These staggering debts paired with decreased investment will slowly but surely drag down the rest of the American economy, and create “not just a problem for individual borrowers but a problem for all of us.”4

Although a sound, long-term plan has yet to surface, a recent deal by President Obama has restructured the loans so that incoming students will face a lower interest rate than initially thought. The new program works by tying student interest rates to the ebb and flow of financial markets; students this fall will face cheaper loans while borrowing is still cheap, but if the economy improves over the next year, as is predicted, borrowing will become increasingly expensive for the US government and the cost will be passed onto students. The program is expected to lower interest rates for as many as 11 million students, saving an average of $1,500 per student.5 As it currently stands, the interest rate for undergraduate loans will be 3.86%, 5.41% for graduate students, and 6.41% for PLUS loans (those taken out by parents of students) with these rates locked in for the lifetime of the loan.6 While Congress has pledged that the loans will never exceed 8.25% for undergraduates, 9.5% for graduate students, and 10.5% for PLUS loans, rates will only increase as markets improve and if Congress continues to skirt it’s duties and ignore the growing problem.

As the old adage goes, “the best way to stay out of debt is to never get into it in the first place,” but many new students and their families no longer have that option. Regardless of where you sit financially, keeping a close eye on student debt and how it’s shaped by both governmental and corporate policy will be invaluable in understanding the economy for years to come. Not only does student loan debt represent a serious problem for the students themselves, but also on a larger scale it represents a serious problem for an entire generation soon to be tasked with taking the reins of the American economy (in years to come keep an eye on the big purchase areas; cars, homes, new construction, and investments). While old money is likely to stay resolute, it’s very possible that if there isn’t a tenable solution to the student loan problem soon we may see the economy start to stagnate in other areas. It’s crucial that investors never forget the damage done by all too recent collapse of the housing bubble, and that you stay in touch with your financial advisors and look at how you’re positioned.

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1Obama Signing Student Loan Deal to Change Interest Rates, http://www.huffingtonpost.com/2013/08/09/obama-signing-student-loan-bill_n_3731549.html

2College Enrollment Dips As Student Loan Debt Nears $1 Trillion, http://www.politico.com/story/2013/07/student-loan-debt-tops-1-trillion-94316.html

3Student debt delays spending, saving – and marriage, http://money.cnn.com/2013/05/09/pf/college/student-loan-debt/

4Excessive Student Loan Debt drains economic engine, http://www.politico.com/story/2013/05/excessive-student-loan-debt-drains-economic-engine-91083.html?hp=l9

5Obama Signing Student Loan Deal to Change Interest Rates, http://www.huffingtonpost.com/2013/08/09/obama-signing-student-loan-bill_n_3731549.html

6Obama signs student loan rate legislation into law, http://articles.washingtonpost.com/2013-08-09/politics/41223761_1_interest-rates-plus-loans-graduate-students