Monday, 28 May 2012

Graph of the week: Student loans


As the tuition fees are rising, student loans are skyrocketing. The following graph comes from last year's text in The Atlantic carrying a rather sensational title: "Student Loans Have Grown 511% Since 1999." 

Source: Indiviglio, D. "Student Loans Have Grown 511% Since 1999", The Atlantic, 18th Aug 2011

So which one was the bubble again?

Bear in mind that the growth in household debt (blue line) was the one responsible for the housing bubble leading up to the financial crisis of 2007 - 2009. But this time, absolute terms are actually more important. The total amount of household debt reached almost $10 trillion (making it systematically much more dangerous), while the student loans increased to around $550 billion, or roughly one twentieth of the size of total household debt. But its rapid, almost incredible growth is still worrying. 

What will happen to those students which cannot repay the loan? During the mortgage bubble burst, people lost their homes. Will students lose their lives with the bursting of the student loan bubble? 

One example particularly caught my attention. It was from a Harvard Business School graduate who found himself in a debt trap after graduating and getting a job. He soon realized that if he were to continue with the repayment of the loan over the 15 year period, his interest payments would equal almost half of his principal. So he started a quest (and a blog entitled "No More Harvard Debt") where his goal was to repay the entire debt within a year. He succeed in 7 months, and even managed to get some media coverage. (Btw, perhaps he could serve as a good example to Congress on how to curtail the national debt - just an idea.)

But not everyone is this prudent or even lucky enough to get a high-paying job that will equal his or her qualifications. I’m sure the return on investment has dropped significantly since more and more college graduates are forced to take lower paying jobs which puts significant financial constraint on them when attempting to repay the loan. 

High unemployment and less job opportunities are putting significant pressures on the current contingent of students as well. They chose part-time work or volunteering only to postpone graduation as much as possible. This biases the official unemployment figures downwards. It’s not true that unemployment is decreasing but that more and more people, due to high uncertainty, choose not to engage in the workforce (or walk out of it). 

A bleak picture is left for the new generations of graduates, and for those just enrolling in the University. The career choices they make now will be determined by the current economic climate, just like it was the case for those who took loans when things were going well. It is this sort of signalling that will influence the specialization patterns of the population in choosing their careers, and consequently the patterns of future economic growth. 

13 comments:

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