October 02, 2012 at 10:44 AM EDT
Is Student Debt the Next Crisis?

Education CostsWe already know that total student debt in the U.S. economy has surpassed $1.0 trillion—greater than total credit card debt.

More than one in 10 student loan borrowers in the U.S. economy defaulted on their federal student loan in the first three years of their loan’s life, increasing the default rate for student loans to a new 14-year high. (Source: U.S. Education Department.)

What can possibly be the reason? A greater number of university graduates are working in areas where their learned skills do not apply. They are working as receptionists, waiters, and retail clerks—low-paying jobs not generating enough money to pay their student debt.

At the same time, while the overall unemployment rate is little above eight percent in the U.S. economy, the unemployment rate for people aged 16 to 24 was 16.8% in August. This has been the case for the last 42 months—the last time this group had trouble finding jobs was from 1981 to 1983. (Source: Bloomberg, September 26, 2012.)

If recent graduates in the U.S. economy are working below their capabilities and earning less, or in many cases not even working at all, will they make their student debt payments? The answer is simple; they will not be able to make their payments, because they can’t afford to.

The increasing default rate on student debt is very troublesome to the U.S. economy, although with the deteriorating U.S. economy, poor domestic job prospects, a higher unemployment rate, and a widespread global slowdown, we shouldn’t be surprised to see this happening. My fear is that, in the end, the government will be on the hook for defaulted student loans, adding to our already ballooning national debt.

Tuitions are also on the rise in the U.S. economy, so current students will need to borrow more compared to those who have already graduated.

Student debt is another debt time bomb. The effects of an increasing number of people defaulting on their student debt will only cause more suffering to the already fragile U.S. economy.

On a personal level, you can’t help but feel sorry for many of today’s young adults. They borrow money to go to school. They work hard at their studies. But when they graduate, they are competing with millions of other students for quality jobs. But instead, they end up working as store clerks or waiters; jobs where their education is not utilized and where the pay is not enough to cover their student loans. This is the reality of the U.S. economy today.

The financial crisis caused by defaulted mortgages back in 2008-2009 created enough chaos in the U.S. economy, which is still struggling to get back to normal. The U.S. economy is under scrutiny already, with its deteriorating middle class, increasing poverty, unequal job creation, and decreasing wages. Issues such as debt problems at the municipal level and the looming crisis in student debt will only cause the U.S. economy to decline further.

 

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