Question

In class we discussed the concept of wage differentials. Historically, a correlation has existed between educational attainment and income level. Acquiring more education (human capital) has always been promoted as a means of escaping poverty. Unfortunately, due to rising college costs, students have taken on unprecedented levels of student loan debt. For this paper, you will research (with a minimum of three additional resources) the "student loan bubble" and proposed solutions to assist the impacted economic actors.

The paper should address some of these main issues:

• Rising college costs and the reason for them.
• Is a college degree still worth the investment?
• What has been the trend in student loan debt over time?
• What are the individual and societal consequences of excessive student loan debt?
• What are some current proposals or programs aimed at solving the problem?
• What are some counter-arguments against student debt forgiveness?
• What responsibility should be borne by the borrower for the problem?
• Should college be reformed and if so what a reform look like?

Answer 1

Student loan bubble has become a serious financial headache for the borrowers of all demographics and age groups. It has transformed into a crisis like situation for the lenders. In United States, there are about 45 million borrowers who collectively owe $1.6 trillion in student debt. Over the past decade, this number has almost doubled. Average student loan debt stands at $32,731. This figure is increasing year on year. Average debt in 2018 was $29,100. With wages remaining stagnant, there is a lot of adversity facing those with student loans. Now these are worrying figures especially because student loan debt is now second only to mortgage loans in the economy. It has already surpassed credit card debt and auto loans category.

Now why are college costs rising so much? As people place more importance on education, the enrollment in colleges has surged in the last 20 years, rising by 50%. Even as demand has been increasing, colleges can charge more tuition because we have a generous financial aid program (loans) that allow students virtually limitless loan borrowing. Colleges use this money to stay competitive by expanding programs and services, hiring more full-time professors, building modern campuses, etc. Thus, colleges charge more because students can pay more, it's as simple as that.

Student loans tend to put a drag on the economy. As with other loans and mortgages, there is a quick financial mechanism to burst the bubble in cases of non payments. For instance, in cases of non-payment of mortgages, the bankers can take possession of the house and sell the asset - same happens with auto loans. But, for student loans, the repayment capacity is dependent upon future earnings. Even if he/she can't immediately pay, their repayment would depend upon potential future earnings. This can also be worked out with the bank, you can modify payment amount and schedules and drag on your loan for years! The effect that this has on the society and economy is that those with student loan debt would have less disposable income for consumption, like buying houses or cars. They will also have less savings for investment purposes. Therefore, this will ultimately lower the GDP and put a drag on the economy. More so given the fact that a whopping 40% of borrowers are set to default on their loans by 2023!

The term bubble can be confusing for some. It is usually revealed to be a bubble when something has a very good narrative around it but does not have a financial backing for it. For higher education, the narrative is very rosy; one that convinced the school graduates that the only path to have a respectable life was through college degree. This made them perfectly okay with taking $100,000 loan for a $40,000 job - the payoffs are abysmal!

So what will happen if things continue on the trajectory that they are? If this bubble burst, the congress would definitely put a cap on the amount of loans the federal government guarantees. Enrollment in higher education would significantly diminish because people would have no other alternative to replace federal loans. And as a result of all this a good number of financial institution might go out of business.

Any solution to this crisis would have to be based on multiple strategies. We'll have to look at tackling outstanding loans, rising cost of higher education, lending mechanism, and reforming the entire nexus of universities, financial institution, and the rest.