The student loan bubble is about to burst

The ever-insightful and knowledgeable Yves Smith, writing at Naked Capitalism, points to a potential trigger for the next economic crisis—the bursting of the massive student loan debt bubble. According to Smith, student loan debt is so large “it’s trumping credit cards as a spending driver.” While other forms of debt have decreased during the Great Recession, spending on student loans has been steadily increasing.

Good jobs that pay a decent salary—i.e. one you could actually live on—are scarce. So people have been going into to debt to pay for training or degrees in hopes of landing one of those elusive jobs. Student loans are more available, s0 people of all ages have been going back to school—a dubious choice given that there is no sign that a robust economy with good paying jobs is in our future.

Other reasons for the massive growth in student loans? The growing for-profit higher education industry is one of the big drivers of the student loan debt bubble. Many people have been aggressively recruited and pressured by these institutions to take out loans and train for career opportunities that, in reality, do not exist. For more information on the corporate/Wall Street hand in the growth of student loan debt, watch the excellent Frontline movie, College, Inc.

Before we get to the bursting part, lets take a closer look at the size of the bubble. Here are some facts from a February 2013 report on student debt published by the New York Fed:

•  The total burden of student debt is approaching $1 trillion

•  Student loan debt has almost tripled between 2004 and 2012.

•  The number of student loan borrowers has almost tripled between 2004 and 2012

In her article, Smith quotes progressive economist Warren Mosler who compares the student loan bubble (otherwise known as a “credit expansion”) to the many bubbles before it that have propped up our perennially dysfunctional economy—the savings and loan bubble of the Reagan era, the dot com bubble of the Clinton years, and the sub prime mortgage bubble of the Bush administration. He points out the obvious: when the student loan bubble bursts, its support of the economy will end. And what leads Smith and Mosler to think it will burst? Have a look at these charts from the NY fed report (Click on each chart to see a larger version):

total debt balance and comp

loan by age group

deliquency 90+

Smith ends with these thoughts:

. . . student loans are not only looking bubbly, but the level of borrower stress is saying something has got to give. One sign is that law school enrollment has fallen 15% since 2010. Students are correctly worried about borrowing heavily in a weak job market. But so far, enough people believe in the value of education as a workplace credential that the student loans outstanding are still rising. It’s hard to discern how this plays out, but the endgame might not be that far off.