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Debt Debacle

The economy is picking up according to all reports. Is the student loan crisis going to resolve itself?

The current student loan situation is not a pretty one. With a national student loan debt standing at close to $1.4 trillion, many fear that this could cause the next economic meltdown. It is an uncomfortably familiar figure, subprime mortgage lending was at $1.3 trillion in 2007, just before the big meltdown. Student debts are still rising so your question highlights the issue.

There is a lot of pressure on today’s younger generation to attend college. In order to do graduate, the majority have to take out loans, going into debt early in life. Loans are readily available and accessible to students. Student loan debt has outpaced all other types, including auto loans and credit cards. Graduates are not earning enough to pay them off quickly, and 11% of student loans are currently in default.

The student loan bubble could be on track to cause an economic crash, but a number of observers have referred to it as a leaky balloon instead. Many believe it will slowly deflate rather than burst.

Millennials are the largest spending group in the country, and their burden is to keep the economy propped up. But with large loan debt, many will be delaying major financial purchases such as homeownership for several years. Without Millennial spending now, the economy is likely to have problems later.

According to reports, student loan debt has outpaced salary growth in the past 25 years. In 1990, graduates had debts equating to roughly 28.6% of their earnings, by 2015 this figure had grown to 74.3%. Meanwhile, wages have not increased at the same rate, but have remained steady. Repayments are harder to make and general spending power is limited.

This may eventually send more loans into default. Student loan debts are more enduring than property or auto loans, where repossession is an alternative. Declaring bankruptcy is also not a ready option with a student loan. Those in default are likely to limp along seeking alternative ways to refinance student loans. A number of options such as income-driven repayment plans can assist some. Restructuring loan repayments will have less of an economic impact than the mortgage crisis a decade ago.

Diminished Millennial spending power is likely to result in declining home ownership, which is a concern for the Federal Reserve. Home ownership creates a lot of related consumption such as furnishings, utilities, and home improvements. These sectors will suffer as Millennials continue to rent or live with parents longer while paying off student debts.  

The student loan bubble could also force more graduates to remain employees rather than pursuing entrepreneurial ventures. Income stability is more important when you have a lot of debt. Long-term effects could mean the next generation sees fewer attending college, because their parents did not accumulate enough wealth. All indicators point to a slow drain on the economy.

“We have to reduce the burden placed on our economy by years of deficits and debt,” Jacob Lew.