Could Student Loan Debt Lead To The Next US Financial Crisis?

Could Student Loan Debt Lead To The Next US Financial Crisis?

Student loan debt is nearing $2 trillion. And not only is this debt a burden to the borrowers, but also to banks. So much so that some financial experts say the next financial crisis may be caused by this growing debt.

“For some analysts, U.S. student debt has shades of the subprime crisis that felled the economy back in 2008,” the New York Post reported.

So why are experts comparing the housing crisis to the current student loan debt situation? The similarities are too close for comfort. “In the early to mid-2000s, lenders introduced risky products like zero-down home loans and option adjustable-rate mortgages, which enabled borrowers to take on more debt than they could afford. Lax lending practices led to increased demand and skyrocketing home prices. When the housing bubble burst and sent home prices plummeting, it set off a chain of defaults that snowballed into a recession. This cautionary tale of risky lending, ballooning debt and market speculation should be a clear warning of looming perils in the student loan industry,” Investopedia reported.

Graduate students cheers as the President Barack Obama delivers Howard University’s commencement speech during the 2016 Howard University graduation ceremony in Washington, Saturday, May 7, 2016. In a commencement speech at one of the nation’s leading historically black schools, Obama said there were no black CEOs of Fortune 500 companies and few black judges when Columbia University awarded him a bachelor’s degree in 1983. ( AP Photo/Jose Luis Magana)

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And just like prior to the housing crisis, lenders are approving student loans without much investigation. “With readily available student and parent loans, obtaining financing is as easy as filling out a few financial aid forms. Much like the mortgage industry before the housing crisis, lenders are extending credit to students without fully weighing their ability to repay the debt. This is particularly true with federally-guaranteed Stafford loans,” Investopedia reported.

Best-selling author and economic satirist P.J. O’Rourke even seems trouble looming. While promoting his new book, “None of My Business,” he said about mounting unsecured debt such as student loans leading to an economic meltdown that “We are headed for trouble.”

And it looks like things are going to get worse. “As tuition and fees continue to increase at both public and private institutions, students’ debt loads are rising along with them. Over the past 20 years, college costs have grown at over three times the rate of inflation, and 70% of college graduates have student debt, with the average borrower owing over $37,000 at graduation,” Investopedia reported.

Student loan debt is long lingering. “Many borrowers don’t pay off their student loans until they are in their 40s, or older, and a significant number never finish paying them off at all. The Brookings Institute estimates that nearly 40% of borrowers who entered college in 2004 may default on their student loans by 2023,” Investopedia reported.

So imagine America going through another financial crisis because of student loan debt things will change radically. “A decade later, many Americans are still recovering from the 2008 financial crisis. Almost everyone knows someone who lost a job, their retirement savings or even a home in its aftermath. While the effects of the Great Recession were felt throughout the economy, its main cause can be traced back to subprime lending in the mortgage industry. Unfortunately, the U.S. may soon be facing a similar crisis in regards to student debt,” Investopedia reported.