Is the Student Loan Bubble About to Burst?

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By Consumers Union on Thursday, November 29th, 2012

More troubling news about student loans this week: according to the front page of yesterday’s Wall Street Journal, the student debt bubble is growing and more borrowers are struggling to repay their loans.  The article cites new numbers from the Federal Reserve Bank of New York showing disturbing trends in the student loan market:

  • U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion just in the third quarter of this year, while overall household borrowing fell during that period.
  • Payments on 11% of student-loan balances were 90 or more days behind at the end of September, up from 8.9% at the end of June – that’s now a rate exceeding credit cards.
  • Meanwhile, delinquency rates for other types of consumer debt fell or were flat during that same time period.

Whether this increase is due to rising college costs, weak job prospects for graduates, or insufficient underwriting (perhaps all three?), the bottom line is that students are being asked to shoulder enormous financial burdens simply to get an education – and it’s causing a major drag on the economy.  As we’ve pointed out before, many student loan borrowers have to put off financial decisions like buying houses or saving for retirement due to their student debt burdens.  If more younger consumers delay buying their first homes, the housing market will be slower to recover – and that impacts our whole economy.

It’s incredibly important for students and their families to explore all their options before taking on student loan debt.  Grants and federal loans should be exhausted before turning to riskier private loans.  For more tips on how to graduate with less student debt, click here.

College graduates should start planning now in order to ensure they can keep up with their loan payments once they become due.  If you are a graduate or a family member of a graduate, check out the CFPB’s “Debt Repayment Assistant” for tips on how to manage student loans in repayment.

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