Since the housing bubble burst spectacularly in late 2007, many analysts have been actively seeking out the next likely explosion. Rest assured, it will be related to debt in some way. US Treasuries, credit cards, and potentially another disaster on Wall Street thanks to over-leveraging have all been mentioned as potential leading candidates. However, there is another bubble out there and it too is debt related. This one, in my opinion, has far greater consequences because it involves a group that is the least financially able to deal with the ramifications. I’m talking about student loans and the massive bubble that has been expanding for at least the past decade.
I can remember a time back in the 1980s when I had several relatives put themselves through state schools by working during the summer and on holidays. They either didn’t carry student loans, or if they did, they were exceedingly small. Granted, these were not Ivy League institutions or anything like that, but it was possible to get an education without going bankrupt. If parents were able to kick in a few bucks, many kids could walk out of college either debt free or very close to it. Credit cards for college students were virtually unheard of.
Fast-forward a couple of decades and for college students who have credit cards, the average balance upon graduation is around $4,000 while the average debt of people in the 19-24 age group is nearly double that. It is not uncommon for a kid to leave college these days with $50,000 or more in student loans. That might not sound like much, but when you’re talking about people who have nothing in the way of serious work history or experience to present to potential employers and a job market that resembles the aftermath of a major hurricane, $50,000 suddenly becomes a lot of money…
What is likely the worst part of this bubble is that nobody really knows how big it is. Many private analysts peg the outstanding debt at over $1 trillion, while the NY Fed claims the outstanding debt is $867 billion, using Equifax data. While even the larger of the two numbers pales in comparison to the outstanding mortgage debt from our earlier example, remember that the debtors in the case of student loans generally have nothing in the way of savings or assets.