THE BLOG
10/08/2012 09:02 am ET | Updated Dec 08, 2012

Increasing Student Loan Defaults Could Drag Down the Economy

The number of people defaulting on their student loans has risen for the fifth year in a row, according to a September press release from the Department of Education. The rate of people who defaulted within two years of their loans entering repayment went up to 9.1% for 2010, from 8.8 in 2009. That number was a relatively reasonable 4.5% in 2003.

Graduates in 2010 (the latest year available) had the highest average student debt ever, according to the Institute for College Access and Success. And if that's not bad enough, they also had the highest unemployment rate for new grads in recent history, at 9.1% (this number, while high, was still lower than the national rate at the time). With ever-increasing debt burdens and a still feeble job market, of course people are defaulting on their gigantic loans.

"Most students in the Class of 2010 started college before the recent economic downturn, but the economy soured while they were still in school, widening the gap between rising college costs and what students and their parents could afford," said another ICAS report.

The last time this many Americans had massive debt they couldn't handle, the housing market collapsed, dragging down the rest of the economy with it, first locally and then internationally.

Not that long ago, millions of Americans took out mortgages they couldn't afford, from lenders who knew they couldn't afford them. The lenders then bundled these risky debts (sub-prime mortgages), and sold them to other lenders for more than they were worth -- debt that won't be repaid has no value at all. Other lenders saw the quick bucks being made, and did the same thing. Then, when, as could have been expected, the borrowers defaulted on their mortgages, it sent a ripple through the entire economy that we're still feeling the reverberations of now.

Now, Americans are taking out student loans that they can't afford, from lenders who know they can't afford them. Those lenders are re-selling the debt to other lenders, and, as student loan debt increases at a far higher rate than the unemployment rate decreases, more and more of these loans are going unpaid.

So, is student loan debt the next big bubble?

Read more at Policymic.com...

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