Student Loan Debt Threatening to the Economy

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As many are all too aware, student loan debt has been skyrocketing in the recent past, rising above $1 trillion and becoming the number one source of debt in America. With the average college graduate owing $40,000 in student loans, and with interest rates held at artificially low levels only through 2015, some believe there is a student loan debt bubble that looks much like the housing market bubble of 2007 – 2008. As for what there is to be done, arguments abound, but no one seems to have all the answers.

Why Student Debt is Potentially Harmful

According to many bankruptcy lawyers, a huge problem with student loan debt is that it is not dischargeable in bankruptcy. Once you agree to take a student loan, you are saddled with this debt for the foreseeable future, and without the protections offered to consumers who take on other forms of debt, such as medical debt or credit card debt. In other words, going to school is a riskier investment in many ways than buying encyclopedias with a credit card and teaching yourself.

Bankruptcy lawyers see the student loan debt situation as a bubble comparable to the housing bubble because of its artificial nature. Essentially, the federal government is comfortable approving near-infinite amounts of student loans, because they make nearly $20 billion per year on the interest, penalties and fees associated with these loans. As stated by the bankruptcy lawyers, these loans are not dischargeable in bankruptcy, and the government is able to collect even from defaulters using the powerful tools at a powerful government’s disposal. So it is in the government’s best interest to continue approving student loans and extending credit to all who ask for it.

In turn, this (for all intents and purposes) infinite amount of available credit allows universities to raise tuition prices at exponential rates (according to some sources, tuition rates have been rising at three times the rate of inflation), resulting in an artificially high cost of education which can only be covered by taking out more federal loans, a cycle which could continue ad nauseam.

Many people have proposed alternatives to this cycle, which some see as a scheme and some as a nearly-criminal system of predatory lending; most involve forcing the government to stop making credit universally available, which would then force the cost of tuition down as higher education became subject to the competitive pricing of a free market. There are dangers in that, however, as there will be a transitional phase in which many potential students may be unable to obtain funding for university education. It is a thorny tangle and will take a lot of hard work to sort it all out.