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Student loans: A crisis in waiting?

Tuition costs have increased at a far greater rate than housing, energy and health care costs, as well as the overall rate of inflation.

By MSN Money Partner Aug 15, 2011 10:46AM

This post comes from Seth Fiegerman at partner site MainStreet.

 

The country may still be grappling with the aftermath of the housing bubble's burst, but one recent report suggests a different bubble may be looming on the horizon: student loans.

 

Student lending balances increased by 10% or more each year of the 2000s, driven by increasing enrollments, easy access to loans and the skyrocketing cost of college tuition, according to an analysis of lending data by Moody's (.pdf file). Even during the recession, when consumers cut back on other loans and general purchases, student loans continued to grow as many students hoped higher education would improve their employment prospects.

 

"Despite all of the attention that house prices receive, it is noteworthy that even during the housing bubble, real-estate appreciation was far exceeded by the growth rate in tuition," Moody's explains in the report. "Fears of a bubble in educational spending are not without merit."

 

Indeed, tuition costs have increased at a far greater rate than housing, energy and health care costs, as well as the overall rate of inflation. To make matters worse, student enrollment in for-profit schools has increased steadily as well, even though these are typically more expensive. In 2009, just over 9% of people enrolled in college were at for-profit schools, twice the proportion five years prior.

 

There was a time when students could enroll in pricier colleges with reasonable assurance that it would pay dividends later on. While studies show that college continues to be a valuable investment, it's an investment that will not pay off in the short term for many students because of the difficult job market.

 

The clearest indication of this newfound difficulty is the state of loan delinquencies. According to Moody's data, those who took out loans in 2008 make up a greater percentage of the total loan defaults than student loan borrowers from 2007, who in turn make up a greater percentage than 2006 borrowers, hinting that those who entered college during the recession years are more likely to default.

 

What's more, Moody's speculates that "delinquency and failure rates will rise in coming years because many students will be unable to service their loans as income growth falls short of borrowers' expectations." (Will you be able to pay back your student loans? Try MSN Money's calculator.)

 

All of this leads Moody's to conclude that student lending could hurt consumers and the economy as a whole in the future.

 

On the one hand, students who pursue degrees at pricey colleges and fail to find competitive employment may be encumbered by their loans for decades, making it that much harder to fulfill their other financial obligations and limiting their amount of disposable income. On the other hand, if students choose to pursue less education (or forgo college altogether) due to cost concerns, Moody's speculates that it could make the U.S. economy less competitive on the world stage.

 

So what's the prescription for success?

 

"Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place," Moody’s writes.

 

More on MainStreet and MSN Money:

83Comments
Sep 5, 2011 4:31PM
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Here is the dirty little secret nobody wants to hear {much less admit}. Here in the USA, we have more college grads than we need. In the future, we will need even less. Many of the jobs/careers that require a degree are no longer here, or won't be in less than ten years. They have all gone offshore, most likely never to return. Do you want to live in Shanghi? Don't worry, they would'nt hire you anyway. The USA is being replaced with the BRIC nations and the other asian countries. What I would advise to the vast majority of todays high school kids, is to attend a trade school. Once you have apprenticed under a master tradesman for a period of five to ten years, start your own business and offer a discount for cash payment. CHEAT ON YOUR TAXES. After all, this is the same government who is complicit in the demise of all the lost jobs in the first place! Doing this, you will come out WAY AHEAD of those who went to college, have no job or are under employed, and are burried with high loan debt. You'll laugh all the way to the bank.
Sep 5, 2011 10:16AM
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The people who talk about a FREE collage education in European countries should realize nothing is free. But their tax money goes for things like health care and education while America's tax money goes to support two wars and a large military complex, foreign aid etc.  We need to stop being the worlds policeman and banker and concentrate more on things here at home.
Sep 5, 2011 2:40PM
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WHAT HAPPENS WHEN ALL THESE STUDENTS CAN'T PAY THEIR LOANS. IS THAT ANOTHER TAXPAYER BAILOUT? WILL THE FEDS HELP OUT THIS PORTION OF THE ECONOMY, OR WILL THEY BE SOLD OUT OWING ALL THEIR LIFE ,WITHOUT A WAY OUT! SLAVERY HASN'T BEEN ABOLISHED, ONLY CHANGED IN FORM.
Sep 5, 2011 9:46AM
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that's because colleges and universities have gone to a "for profit" status rather than a "for education" status
Sep 2, 2011 11:23PM
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It is a question all of us should be asking; Why the increase in tuition and fees? It is apparent that a college degree no longer ensures a good job, or any job for that matter. How can the colleges and universities justify the steadily increasing tuition, especially for online courses, where no classrooms are being used, so there is very little overhead in the cost of these classes. I think paying over $500 per credit hour for an online class is outrageous! I spent one year in college, hoping to increase my chances of finding work, but I am still unemployed and now have over

 $14, 000 in student loans to repay. I know quite a number of people who hold various degrees, who can only find employment in fast food places. Dose this not bother anyone else? What ever happened to vocational schools who taught you a trade? Seems to me there is a serious gap in what is being taught and the changing job market.

Sep 3, 2011 2:19AM
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Tons of money is being made by the lenders and financial aid bloodsuckers that convince students to borrow money.  They don't tell the kids that they might never ever be able to repay the loans because the interest rates multiply faster than their income ever will.  That extra money can be added on and the student can't even prove that they don't owe.  That they can pay monthly for 20 years and owe six times what they borrowed...  It's immoral and should be criminal to do that to our students and citizens that are just trying to get ahead in life by getting an education. 

Sep 2, 2011 11:37PM
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This market is only touching the surface of the student loan crisis.  It has been a problem for a decade and keeps growing.  I have almost $200,000 in student loans and they started at $40,000 when I left school.  I was laid off 3x different times loosing jobs to people coming here with green cards willing to work for a fraction of the going wages.  I couldn't compete with that!  When I went into default, they tacked on 23% penalties each time along with compounding interest.  That should be illegal.  There is no limit to how many penalties they can tack on.  Many people are moving abroad because they have no way to pay the money back.  Obama has tried to institute some programs to help, but it isn't NEAR enough.  The government has the almighty power to seize your bank accounts without notice, seize property, garnish wages all without due process like any other credit would have to do.  They offer this income sensitive program, but what they don't tell you is that after you follow the program, they turn the debt you didn't have to repay into taxable income.  They are just shifting it from one form of debt to another.  Imagine getting a tax bill for $50 or 100,000 in one year.  Not a solution in my book!

The reason the tuition keeps going up is because schools keep building multi-million dollar campuses thinking its the only way they are going to attract more students.  I call BULL**** on that.  Whether they are for profit or not, there is no reason to continue to hike up the costs making getting a reasonable education for the average person so far out of reach.

You should check out the many websites dedicated to trying to bring awareness to the unscrupulous student loan industry.  Look at www.studentloanjustice.org.  Or, google student loan crisis and you will find a wide variety of sites on this too.

Sep 5, 2011 12:34PM
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Grants and government-backed loans have pumped ever more money into the education market.  The idea was to make college more "affordable", but the actual result was simply to drive up prices.  Schools upped their tuition and fees to absorb what students and parents could pay, plus the extra money from the government.  This is just another example of what happens when the government distorts the market.  Similar forces inflated the housing bubble; instead of trying to reduce housing prices, government programs just pumped more money into the market.  If you artificially increase the amount of money flowing into a given sector of the economy at the same time you're convincing everyone to demand more of it, rising prices are entirely predictable.

Of course, college might not be seen as a necessity if primary and secondary education hadn't been dumbed down and diluted to the point of irrelevance. 
Sep 4, 2011 8:04PM
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I got one of the best degrees possible - computer science and 11 years later I'm still paying for it.  No house or kids are in my future.  Kids save your future and don't go to college.  You don't want to be Sallie Mae's slave.  One more way to screw the middle class - charge the kids interest for their education and then give the payee a lower tax rate on their corporate jet and stock options.
Sep 3, 2011 12:15AM
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 An important point missing from this article is the very high interest rate that comes with many of these loans.

 Commission based school recruiters mislead students into signing contracts while telling the student that PELL grants and other grants will cover all or most of tuition, when the truth is generally maybe 30% to 60% is covered and the rest is put into a high interest long term student loans that leave the graduate in major debt.

 Schools and congress have turned a blind eye to this and when questioned why this is allowed you are shuffled to someone else who shuffles you to the next and down the line you go, to nowhere.  The banking industry loves this because its classified as a student loan and can not be dismissed.    This is not just a crises its a crime.

 There are some private schools that offer no-interest payment plans, so shop around!!!

 

Sep 2, 2011 11:15PM
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It's difficult to know what fields will be in demand by the time you graduate. I chose a major that was in high-demand when I entered school, but by the time I graduated that market dried up.

And as we've seen in the past for pharmacists, when there is a demand, too many people flock that field and we wind up with not enough jobs for the supply of workers.

Sep 5, 2011 10:51AM
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Things were in line until they protected Student loans from bankruptcy.  Once the risk to the banks and Education institutions was removed the rates skyrocketed.  I borrowed, my wife borrowed.  We have decent jobs, but are slaves to the loans until we retire.  60K paid back, but 53K was interest.

Did anyone note that the financial collapse in 08 was right on the heels of more stringent bankruptcy laws?  seems to follow a pattern...remove the risk and the lenders will find idiots like me.

 

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So, instead of institutionalizing the universal practice of permitting illegal aliens from Mexico to receive loans, grants and scholarships (based on financial need) without requiring the same background check of asset declarations required of every US Citizen, the FAFSA application required is universally waived for anyone claiming to be an illegal alien from Mexico, because if the illegal alien filled it out, the illegal alien might fear deportation and like every US citizen, if filed falsely federal prosecution) We need to restrict financial aid to those in the United States legally and not include temporary residents who are here temporarily. These financial aid programs are not aid ot foreign nations programs.

Sep 5, 2011 11:08AM
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Gee, wonder what would happen if folks simply refused to attend the high dollar schools? My husband worked as a union millwright {trade} all of his life. No loans required. Good pay good benefits. We have 5 children ranging from 21 yr old twins, a 24 yr  old, 27 yr old and a 30 yr old. All have jobs and live on their own. We have a PTA, Nurse, carpenter, school teacher and one still in college on scholarship. None have attended any high dollar school and carry any massive debt.

 Do not live beyond your means and Teach your children this, also.

Sep 5, 2011 7:56PM
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A young male takes out $35,000 in federally guaranteed student loans for a college. After graduating he starts paying back the loans.  He meets a woman and (married or unmarried) becomes a father.  The couple seperates and mother files for child support.  Father wants to and agrees that their child has to be financially supported.  He voluntarily submits his financials and the amount that he can provide for their child’s well being.  However, because of  laws made by politicians, a family court administrator assigns a child support order so ridiculously high that federal student loans, income taxes, rent, food, telephone, life insurance, carfare for work cannot all be met.  Father’s credit is severely damaged. He falls behind on child support and due to arrears, child support enforcement agencies garnish 50%-60% of wages and suspends his state issued professional licenses. Father is called a “deadbeat.”  50% garnishment + 25% single person income tax obligation creates a total of  75% of earned salary taken from pay.  Out of every $1,000 earned father brings home $250, or $50,000 yearly salary leaves father just $1,042 net per month.  Out of his significantly reduced take home pay father is expected to pay the above bills especially the taxpayers student loans, still be a father to his child or he is labeled a “bad dad,” and maintain a cordial relationship with the mother.  Father soon DEFAULTS on the student loans.   His college degree is rendered worthless, he is financially ruined.  Due to extreme stress he decides to leave, disappear, and start anew.  Taxpayers are now paying back his student loans.  This scenario (except for the salary) is played out in family courts everyday across the country.  Child support laws is becoming the pin that will burst the student loan bubble.  The laws has to change so that student loans and federal income taxes at a minimum are deducted from child support calculations!

Sep 5, 2011 10:36AM
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Choices, choices, choices.  Who's fault is it when you make a bad one?  Some people have mortgages that are less than their student loan debt!  Bottom line, if you have to sell your soul or kidney to pay for your education there is something wrong (and SHAME on the so called "educators" for creating this problem in the first place)!  If you are paying $150,000 (+ in some cases) to work at a job that will never reach beyond 60 or 70 thousand - it is best to pull out the spreadsheets, calculator or pen and pencil and rethink it.  I went to a state school and paid less for 4 years of education than some other schools charge for one year!  I've never attended the fancy high priced schools but I consider myself well educated.  I have worked with people who have attended those high class, super expensive schools and I consider myself just as capable (if not more so in some cases).  Here I am 35 years old and I have been student loan free for 5 years.    Don't mortgage your future to put fancy wine on someone else's table.  Pay less for your education and enjoy the spoils for yourself!!!
Sep 3, 2011 1:23AM
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Who would have seen this coming?  I graduated with and A.S. Degree from a Community College (very low cost, if any), then went to a State College to obtain my B.S.  Total student loan debt = 24K.  Had to use up the two year forbearance period before I could make payments since I was making $10 / hour starting out.  Things are much better now that I have been with the same company for 10 years.  I remember my High School Counselor telling me someone with a B.S. would come out of college making 40K+, he was definitely full of BS all right.  I can't imagine how those with six figure student loan debt have a prayer in this job market.  Funny thing is how many Ivy Leaguers think their diploma is somehow better than one from a State School.  Go ahead and send your kids to that private college and be ready for them to move back in once they graduate.  What they really don't tell you is that defaulting on Student Loans is just as bad as cheating the IRS.  The government will ruin your credit, life, and put a lien on anything you attempt to purchase for the next 40 years.  Maybe that is the governments plan any way.  They will just keep all of the defaulters Social Security Checks when they turn 65 and not have to worry about the short fall in the SS Fund anymore.
Sep 2, 2011 11:27PM
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They need to start to reform this nightmare now.  The current student loan (no bankruptcy exit option) system is nothing less than indentured servantry.

 

Don't sign them loans kids!

 

Don't sign them loans!

Sep 22, 2011 5:55AM
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Student loans are undoubtedly the biggest scam going today.  What you have is a protected industry dumping truckloads of B.S. on American families, while at the same time saddling them with tens or even hundreds of thousands of dollars in unsecured debt.  Yes, it is unsecured debt because there are ZERO UNDERLYING ASSETS to back a student loan, unless the parents are dumb enough to put their house up as collateral.  It's no different than credit card debt, which is unsecured and can be discharged 100% in a BK filing.  We need a change in the BK laws to allow this toxic debt to be discharged through Chapter 7.

 

As far as the student loan industry goes, your claim that there's an income stream underlying these toxic loans falls on deaf ears.  The only stream I see is the one running down your pant legs from one too many three martini lunches paid for by families in this country.

Sep 2, 2011 11:37PM
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meanwhile european and canadian kids get solid, low priced university education...and then US companies hire them for jobs here...yeah capitalism! Its taking down America quicker than the communists ever dreamed.
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