Could student loans trigger the next financial crash?
When looking at the more than $1.4 trillion in outstanding student loan debt, some experts worry that it could be the next financial bubble. After all, subprime mortgage lending was at $1.3 trillion in 2007, just before the market crashed, according to a study published by the University of North Carolina at Chapel Hill.
Student loan debt has surpassed those numbers — and continues to rise. What’s on the horizon for America’s student loan debt?
Where student loan debt stands today
Because young people are pushed to go to college and encouraged to get loans to make it happen, they are in deep debt. The availability of these loans makes it relatively easy for students to pay for college.
According to the Federal Reserve Bank of New York, the biggest increase in non-housing debt in 2017 was due to student loans:
Though all types of debt have been on the rise, student loan debt saw the biggest jump. It’s beginning to eat up a bigger chunk of household finances; not even credit card debt is increasing at the same rate.
Unfortunately, graduates aren’t making enough money to handle the burden. A whopping 11 percent of student debt was delinquent or in default in early 2017.
Eventually, student loan defaults could rise to unsustainable levels. When that occurs, the economy will face a challenge.
But is the student loan bubble on track to repeat the housing market crash that occurred a decade ago? Not everyone thinks so.
The student loan bubble may be a ‘leaky balloon’
Joseph Hogue, a former economist for the state of Iowa and finance writer at PeerFinance101, doesn’t see the student loan bubble as something ready to pop at any second. Instead, he views the student loan crisis as a balloon with the air slowly seeping out.
“It’s more of a slower deflation, like a leaky balloon,” said Hogue. “It’s not really a bubble in terms of expansion and a sudden pop. But it’s definitely going to have an impact on the economy.”
Hogue believes that trouble from a student loan bubble will result from the enormous amount of debt millennials carry.
“Student loans have a huge effect on the largest demographic population in the United States,” Hogue said. “We’re looking to millennials to keep the economy going. Unfortunately, with such a huge student loan burden, they probably aren’t going to be able to do that.”
Hogue pointed out that many millennials put off major financial milestones and are wary of spending money because of their student debt.
“They have to make those student loan debt payments,” he said. “It impacts all the consumption that money could be spent on instead, like homeownership and buying cars. It’s going to hold them back from investing and getting started in other aspects of their financial lives.”
Without millennial spending, the economy is likely to see problems down the road, said Hogue, in spite of current leaders touting efforts to boost future economic growth.
Student loan debt outpaces wage growth
According to the Huffington Post, the typical college student in 1990 graduated with debt equivalent to 28.6 percent of their annual earnings. By 2015, that number had grown to 74.3 percent of earnings. Meanwhile, median wages have stagnated over the years.
Even as student loan debt has increased to keep up with the rising cost of college, wages have remained steady. That makes it harder to make student loan payments and keep up with other bills. As student loan payments continue to eat up a larger percentage of millennials’ incomes, they’re unable to spend on other items.
Eventually, more millennials are likely to be unable to make their payments and enter default.
The effect of a rising student loan default rate
Even though student loan defaults could cause problems for the economy, Hogue thinks the damage might be limited. He points to the difficulty borrowers face in getting out of paying for their student loan debt.
“Student loan debt is much harder to walk away from than other types of debt,” he said. “You can’t look at car loan and housing debt and compare that to student loan debt. There are factors keeping the student loan bubble from bursting due to massive default.”
For example, most borrowers can’t get rid of student loans by declaring bankruptcy. You can’t walk away from your student debt like you can from a foreclosed home.
That doesn’t mean default won’t have its impact; it’s just more likely to be a slow-moving impact, in line with Hogue’s idea of a leaky balloon.
Borrowers who default on their student debt are more likely to see their wages garnished, Hogue said. Instead of massive defaults and losses, student loan borrowers are likely to limp along trying to make payments and pursuing other repayment methods, such as income-driven repayment plans.
Hogue thinks the impact of this will be seen in the economy, but not on a scale as dramatic as the housing bubble.
“Student loan defaults won’t affect the economy quite the same as the fiasco with mortgage debt,” he continued. “There’s more likely to be a massive restructuring of payments, rather than people being allowed to massively default. It’s a creeping thing.”
Millennials put off major spending, and that harms the economy
When many pundits discuss the student loan debt bubble, they focus on the large amounts of debt students are taking on, said Hogue. However, it’s the fact that they can’t make other purchases because of the debt that really matters.
It’s the struggle to repay these loans that result in many millennials putting off other financial choices, said Hogue. They don’t have enough money to make their payments and engage in activities that will keep the economy running.
One of the big factors, he pointed out, is homeownership. The Federal Reserve is already concerned about declining homeownership rates among those with student loans. But it’s not just about buying a house — it’s also about the consumption that goes with it.
“Millennials are stuck renting with multiple roommates or heading back to Mom and Dad,” Hogue said. “They won’t be doing all the things that come with homeownership, like buying furniture and making home improvements. That consumption is vital to the economy, and it’s on a downswing due to student loan debt.”
He also points to spending on other items, including vacations, clothes, and cars.
“Millennials are acting thrifty and staying away from credit card debt. They’ve been scared off debt, and for good reason,” Hogue continued. “But it also means less spending to keep money moving around and the economy going.”
Wealth creation and entrepreneurship
Hogue also sees economic problems coming as millennials put off entrepreneurship. He’s not alone. In 2016, the Small Business Administration warned that entrepreneurship is lower among millennials than in previous generations.
Millennials are more likely to work for others than be self-employed, and that could have economic consequences down the road. Hogue said that small business development and entrepreneurship provides opportunities for economic growth.
“But if you’ve got all this debt, you’re looking for a stable nine-to-five,” he said. “You’re less likely to start a business.”
“We’re not going to get that small business push,” Hogue continued. “If we’re not getting that from an entire generation, what does it mean for the next 10 to 20 years? Not to say millennials don’t have that drive, but they have this extraneous burden holding them back.”
Hogue also sees impacts for the following generation. “As millennials get older and their kids start going to school, they are going to be much less ready to pay for their kids’ educations,” he pointed out. “That will have second-order effects as far as education in America.”
We might already be seeing a shift in Generation Z. They’re more likely to consider college affordability and community college than millennials.
How you can avoid contributing to the student loan bubble
If you’re drowning in student loan debt, you might be worried about the impact of a student loan debt bubble. While the country grapples with this issue on a national level, see what you can do to avoid becoming a casualty.
- Federal student loan debt relief: Consider income-driven repayment plans and deferment options. These programs can make your payments more manageable.
- Private student loan refinancing: You can refinance your student loans to a longer term, lower interest rate, or smaller monthly payment.
- Debt reduction and retirement savings: Once you have your student loan payments under control, create a budget. Pay down your high-interest, non-student-loan debt, and then start investing for retirement.
Though your degree may have cost you a pretty penny, it’s likely still a smart investment.
“The price of higher education has grown exponentially,” explained Hogue, “but it’s still a good investment as long as people carefully consider what they study, and as long as they graduate or get a certification.”
No matter what your financial situation is, you can likely find a program that can make your student loan debt more affordable. See what steps you can take to avoid defaulting on student loan debt. That way, you can avoid contributing to the student loan bubble.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
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3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.
4 Important Disclosures for SoFi.
5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 01/21/2021 student loan refinancing rates range from 1.99% APR – 5.25% Variable APR with AutoPay and 2.95% – APR – 8.28% Fixed APR with AutoPay.