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The sound of rumbling from the student debt bubble

Published: October 11, 2012
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Source: My Budget 360

The flashing alert signs permeating from the higher education bubble should give people pause to the next flavor of the day bubble.  This month information was released regarding consumer credit growth.  Most of the headlines took this as positive economic news but digging deeper into the data we realize that the bulk of the growth came courtesy of exploding student debt.  Even with the encyclopedia amount of data showinghow horribly run many for-profit colleges are run, the government continues to back these risky endeavors while saddling young Americans with unrelenting levels of debt.  It doesn’t take a rocket scientist to see the predatory nature of these operations just like it was easy to see subprime loans were going to end badly.  So why continue to allow this to go on?  Why is the system so adamant on continuing to pour layer upon layer of student debt syrup onto the younger segment of our nation that is already struggling in the employment market?

The continuing expansion of student debt

Every month the student debt bubble gets bigger and bigger:

student loan debt outstanding

The figure above should shock you yet the student debt bubble simply continues to roll along.  It was surprising to see the headlines this month regarding consumer credit growth.  The headlines couched the growth as something positive but the underlying reality is that 58 percent of this growth came directly from expanding student debt:

August changes in consumer credit

Source:  SoberLook

The 58 percent of growth from the Federal government is all student loans.  Keep on fiddling while this unsustainable bubble keeps on growing and the longer this goes on the more painful the burst will be when it inevitably occurs.

This isn’t a new thing and the rate of growth for student debt is simply out of control:

student debt growth

Over the last 20+ years student debt has grown by over 17 percent annually based on only the government portion of data.  The early 2000s saw a slight decline as the private market was eating up some of this debt as well.  But look at what happened during and after the recession.  Student debt at some points was growing at an annualized 80+ percent!  This was for the government backed loans as the private market retreated from student debt (a common story with mortgage debt as well).

There is little justification for this astounding growth.  Wages have not kept up to signify an underlying return on investment that makes up for this deep change in debt.  We also realize that student debt is the fastest growing sector of debt in our economy:

crazy student loans 2011-q2

This is really the elephant in the room right now for the economy.  The fastest segment of debt growth right now is coming from student debt.  We are well over $1 trillion now and this is now into a territory that is likely to cause a shock to the economy once it pops.  What is the banking system and government doing about this?  Not much really as we see from the latest data on consumer credit growth.  Apparently saddling countless young Americans with suffocating student debt now passes for solid economic news.

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