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Is A College Debt Bubble Collapse Next?

December 6, 2010 by  

Is A College Debt Bubble Collapse Next?As the United States struggles to deal with the collapse of the subprime mortgage bubble, another economic bubble may be about to burst. In a Dec. 2 Yahoo! Finance article, author Laura Rowley pointed out that the college debt bubble shares some traits with the subprime mortgage bubble.

According to Rowley, student loan debt has grown four-fold in the last decade, to $833 billion this June, a number that actually surpasses credit card debt for the first time in U.S. history. In addition, defaults on that debt have skyrocketed. In 2008, which was the last year for which default numbers are available, more than 238,000 borrowers defaulted on student loans. According to The Chronicle of Higher Education, default rates ranged from 20 percent for Federal loans to 40 percent on loans to students who attend for-profit schools.

Rowley also points out that before the subprime mortgage bubble burst, lending institutions were offering big, no-money-down mortgages to unqualified borrowers, a practice in which the student loan institutions are also involved. “Private student loan firms offered instant online approval for up to 100 percent of college costs to students, in some cases for four consecutive years,” she writes.

The lenders would be the big losers in a college debt bubble collapse, according to Rowley. “Lenders can’t repossess a college degree, and changes to the bankruptcy law in 1984 and 2005 mean borrowers can’t charge off their obligations the way they can shed credit-card, mortgage or even gambling debt when they file for bankruptcy.”

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