The next bubble: student loan debt

Students graduating college last year owed a record amount in loans. Compared to five years ago, borrowing has increased 20% to an average bill of $25,250. The rise in borrowing is unsurprising considering that, while American wages have generally stagnated, tuition has swelled. For instance, under the most optimistic projection, the University of California system will have increased tuition 300% between 2006 and 2016.

That record debt level would be OK if it financed degrees of record value. Instead, recent graduates face an unemployment rate of 9.1%, and even those who can secure jobs earn about 10% less than their pre-recession counterparts.

So what happens when students owe a record amount in college loans at the exact moment when their financial prospects are the worst they’ve been since The Great Depression? Consider not just the individual consequences, which are severe, but the consequences for our society. This problem has stunning breadth as well as depth: two-thirds of graduates take out loans, and their combined debt now totals $1 trillion.

tumblr_lw59booL2P1ql6jblo1_400The answer hasn’t fully revealed itself, but we can already detect important contours. In the 91% increase in student loan defaults in the last five years. In the youth-led Occupy branches in hundreds of U.S. cities. In the malaise and pessimism among members of a possible ‘Lost Generation.’ Then, of course, there’s the cautionary memory of the housing bubble. If these phenomena are any guide, we should avoid finding out what happens when we mix high unemployment and high student debt.

With long-term economic prospects frightfully dim, the massive debt burden can only grow. Education has become severely over-priced, and the debt required to finance it will suppress demand for decades. This situation desperately needs to be addressed by something other than market faith. Borrowers need bankruptcy protection, which they are currently denied, and, very likely, they need significant debt forgiveness.

Opponents of debt forgiveness say that, morally, borrowers must take responsibility for the loans they’ve assumed, and, more personally, they say that they avoided debt or they slaved to pay back what they owed, so why should other borrowers get a free pass? These arguments are certainly understandable. But regarding loan contracts as sacrosanct and vindictively insisting on personal responsibility, while briefly satisfying, does nothing to address the economic nightmare that $1 trillion in unserviceable debt promises to usher in. If their response to this incipient crisis is to hold the line, then it’s clear where the real irresponsibility lies.