Could College Debt be the Next Bubble?

According to financial aid expert, Mark Kantrowitz, the student loan “debt clock” reached the $1 trillion milestone last year. Even as Americans have reduced their credit card debt over the past few years, student loan debt has continued to climb — both for students and for parents borrowing money on their behalf.

A perfect storm

Soaring college costs, stagnating incomes, declining home values, rising unemployment, and increasing discussions about the importance of a college degree — have all led to an increase in borrowing to pay for college. According to the Federal Reserve Bank of New York, as of 2011, there were approximately 37 million student loan borrowers with outstanding loans. From 2004 through 2012, the number of student loan borrowers increased by 70%.

With total costs at four-year private colleges pushing $250,000, the maximum borrowing limit for dependent undergraduate students of $31,000 for Federal Stafford Loans barely makes a dent. This leads many families to turn to 1) private student loans, which parents typically must cosign; and/or 2) Federal PLUS Loans, where parents can typically borrow the remaining cost of their child’s undergraduate education from Uncle Sam.

The ripple effect

The implications of student loan debt are ominous. Students who borrow too much are often forced to delay life events that traditionally have marked the transition into adulthood. According to the U.S. Census Bureau, there has been a marked increase in the number of young adults between the ages of 25 and 34 living at home with their parents.

It’s not just young people who are having problems managing student loan debt. Borrowers who extended their loan payments beyond the traditional 10-year repayment period, postponed repayment through repeated deferments, or borrowed more to attend graduate school, may discover that their loans are now competing with the need to save for their own children’s education. Parents who cosigned a loan or took out a Federal PLUS Loan, may find themselves saddled with education debt just as they reach their retirement years.

There’s evidence that major cracks are starting to appear. According to the Federal Reserve Bank of New York, as of 2012, 17% of the 37 million student loan borrowers with outstanding balances had loans at least 90 days past due. Unfortunately, student loan debt is the only type of consumer debt that generally can’t be discharged in bankruptcy, and defaulting on a student loan can ruin a borrower’s credit — and chances of landing a job.

Tools to help

The federal government has made a big push in recent years to help families research college costs and borrowers repay student loans. For example, net price calculators, which give students an estimate of how much grant aid they’ll likely be eligible for, are now required on all college websites. The government also expanded its income-based repayment program last year for federal student loans.

Families are increasingly researching majors, job prospects, and salary ranges, as well as comparing out-of-pocket costs and job placement results at different schools to determine a college’s return on investment.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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