Student Loans: The Next Big Financial Crisis

Updated: Aug 2, 2020

Only in America can you find some of our youngest generation of people in tremendous amount of debt before the age of 25. Student loans have been a growing concern for several years now, in fact almost two decades. The crisis of growing debt doesn't seem to phase the current administration as young people across the country have been finishing school with debt much more than the previous generation.

So one might ask, what's going to happen next? The financial crisis that left the mortgage industry in shambles may make its return with student loans. In fact, I predict that student loans will reach a peak and in about 7-10 years at the most. To further understand my hypothesis, you must first understand the economic cycle. Roughly every eight to ten years the economy takes a dramatic downturn. With this year marketing the 12th year since the Great Recession on 2008, the market has outperformed and been bullish for quite some time. Some could even say the trends of another downfall has made itself present, in fact you can see the signs everywhere from housing, interest rates to the bond yield. Well the same is for student loans. There are signs of a low percentages of students already defaulting, with an even larger putting their loans on deferment. Now the majority of student loan holders, do pay their loans, however the number of those who don't is growing. I've put together signs that indicate this trend that is forming and potentially the next crisis in tow.

Borrowing Loans Have Increased

In 2019, it was reported on Forbes that student loans has swelled to 1.6 trillion, making it the second largest consumer debt among Americans. With rising tuition costs, students are taking out 40% more debt than they did 10 years ago. My mom had a 529 savings accounts for us three girls to share. Coincidentally, most of it went to her last born, since me and the middle child were able to get full rides to our institutions. However it didn't stop my baby sister from being crippled with debt. Currently, even with all that help, she is paying almost $70,000 in student loans. Against our advice, she decided to go to school out of state although since I graduated the average cost of student loans has increased by 12%. My sister and I have almost 8 years between us, I would like to say although it increased, she probably could have avoided such a high amount if she had decided to stay in-state.

Student Loan Debt Repayment Is taking longer

Due to the massive amount of debt and other financial obligations of living every day life, it's taking people much longer to repay their debt back. Let's face it folks, the cost of living has gone up too. I always think about when I first graduated from school and all my money was my money and yet I still felt the hardship when it was time to save. I was making a whooping $48,000 in 2010 and for someone with no student loans that was a lot during that time. My only debt was my car loan on a gently used Nissan Altima. It was only after paying the car note a few months in, I realized how lucky I was to be able to own a car and have my own apartment because not having student loans was a real blessing to me. Most students are already broke when they are in college and so coming out of school in deficit would only drive the longevity of repayment.

Student Loan Default Rate Are Increasing

In the last three years, default rates for student loans have steadily increased from a 11.3% in 2013 to 11.7% in 2017, according to an article published by Forbes. What I found the most interesting about the article was that it put some accountability on the schools by warning students that if a school has an increasing default rate, beware of that school. I had to laugh a little and say well that makes complete sense. They are basically stating the school should be justifying their expensive costs with some nice ROIs in the form of nice after-college career. If a cap is not the next best thing, I think as the article stated penalizing the school would definitely help them rethink what they are charging students. If your tuition doesn't equate to the job pay, then what are we doing here?

Schools Keep Increasing Their Tuition

I'm so against this for several reasons, with the number one reason being equality for all to be able to go to the school of their choice despite their financial background. Due to the rising cost of education, it often becomes a competition for the haves and have nots. I believe like most things American, universities and colleges have become a business. Instead of focusing on the quality of education, a lot of universities and colleges have focused on increasing that bill by adding a new rec center or cafeteria to justify their increase in tuition. As I stated previously, I believe a cap should be granted because the issues lies upon graduation when most students don't make the income they borrowed when they leave school. I feel like if schools can measure their quality of education by the income that students will make when they graduate, maybe then I can buy into their need to increase school tuition so aggressively.