We've heard a lot about market bubbles bursting in recent years. First, it was the housing bubble back in 2006, then it was the American auto manufacturing bubble back in 2008. The economic downturn that resulted became known as the Great Recession, and the climb back from it has been steady, albeit slow. One of the factors economists have been sounding alarms about for several years now is the impending student loan bubble.
Currently, more than 44 million borrowers owe more than $1.44 trillion in student loans, which many market analysts believe is causing a growing drag on the economy's recovery.
Student loans are dragging down the economy
Decreased funding for secondary education as well as lax regulations on for-profit schools have contributed to the exponential growth of student loan debt. The average borrower now has $26,700 in student loan debt that they cannot easily repay. What's more, if they default, their payments can grow out of control quickly, and they will be less likely to ever be able to pay them off.
According to a 2012 New York Times analysis, a representative from the Consumer Financial Protection Bureau "likened excessive student borrowing to risky mortgages. And as with the housing bubble before the economic collapse, the extraordinary growth in student loans has caught many by surprise.
But its roots are in fact deep, and the cast of contributing characters -- including college marketing officers, state lawmakers wielding a budget ax and wide-eyed students and families -- has been enabled by a basic economic dynamic: an insatiable demand for a college education, at almost any price, and plenty of easy-to-secure loans, primarily from the federal government."
As with previous economic bubbles, people have been sounding alarms about the student loan debt bubble for years only to be met with shrugs and platitudes about personal responsibility. That same article points to one of the biggest causes of this bubble - in the 1980s, the cost of college tuition began to rise faster than household incomes. Today the cost of college has tripled since 1980 while household incomes are basically the same when adjusted for inflation.
When you figure that into the fact that most well-paying career paths require a college degree, the cause of the massive rise in student loan debt begins to come into focus.
Perhaps the most compelling thing to take into account is that this massive student loan debt burden is preventing people from participating in our consumer-oriented society at a time in their lives when they should be purchasing things like homes, cars, and other consumer goods.
Many of the people who are being burdened with this debt report that it affects their holiday spending, prevents them from traveling to see friends and family, and even prevents them from having people over for holiday gatherings.
And if the holidays are when retailers are supposed to make it into the black for the year, that spells serious trouble for the overall economy.
The case for student loan forgiveness
Half of 18-34-year-olds say they would gladly give up their right to vote in the next two elections if their student loan debt were to be wiped out. That's not a realistic goal, but it does give us a glimpse into what a large burden this debt load can be on young people. And it's not just laziness on their parts -- college grads with student loan debt are twice as likely to work a second job to pay off their loans, while at the same time they are twice as likely as their non- loan-burdened counterparts to say they aren't able to live comfortably.
There are some student loan forgiveness programs out there that can lessen the burden on people in certain service-related fields like teachers, nurses, and firefighters based on how long they work in those fields. There are also income-based repayment plans.
Unfortunately, there are pros and cons to these programs -- they aren't an end-all solution to the crushing debt bubble that could burst at any time. Every budget can reappropriate funds, defunding the programs many people in the service sectors are depending on. And interest continues to accrue when they are enrolled in many of these programs, which can leave them in worse shape than when they started if they drop out of the program early.
Only 4% of employers offer any sort of student loan assistance as a benefit, while 76% of loan borrowers say that would be a deciding factor in looking for their next job. The private sector has an opportunity to offer a solution for this problem before the bubble bursts, but the private sector won't be able to do it alone.
Learn more about the case for student loan forgiveness from this infographic.