A student loans debt crisis could trigger another recession according to some experts.
As previously reported by The Inquisitr, the 2013 government shutdown fight is over high Federal debt, which happens to include student loans. The current 2013 Federal deficit estimates by the CBO have Congress overspending by “only” $750 billion so far and that number is unlikely to go over $1 trillion like in previous years.
Student loans debt has crossed the $1.2 trillion mark, with Federal student loan debt accounting for over $1 trillion of that amount. This means student debt alone accounts for over six percent of the $16.9 trillion federal debt. If a large enough percentage of students default on their student loans this could have catastrophic effects on the economy. This is similar to how the housing bubble bursting caused the Great Recession, but that financial crisis only involved $900 billion.
Student loans debt apparently has about doubled since 2007, when Congress began reducing student loans interest rates dramatically in order to make it easier for Americans to go back to college while waiting for the Great Recession to resolve itself. After all, an educated workforce is a highly paid workforce.
But the unemployment rate didn’t improve as much as expected, with third party estimates claiming the real unemployment rate is much higher. Without good jobs the college students who took those student loans over four years ago can’t pay them back. To make matters worse, the average $27,000 student loan would become as expensive as a house if the student loan isn’t paid back quickly and the student loans interest rates return to the 8.25 percent market cap. For example, if a $27k student loan is paid back in 10 years the interest payments alone are $22,275, bringing the total cost to $49,275. (These numbers do not represent actual student loan repayment schedules.)
Forbes point out that “half those loans aren’t currently being repaid is because student loans are made without regard to the creditworthiness of the borrower.” This is the same reason that created the mortgage housing bubble in the first place. Although a major difference lies in how credit worthiness is calculated. In the case of student loans, credit calculations don’t take into account whether a person wants to become an engineer or if they’re pursuing a niche degree that has few jobs.
The student loans debt crisis is crippling the economy regardless. Students and families mired in student loans debt can’t buy a home or start a business without getting bailed out by family or friends. There’s also the danger of a wave of students loan defaults triggering yet another financial industry collapse and another stock market panic. But student loans backed by the government can never be escaped, not even in bankruptcy, so the bad credit score will haunt millions for years to come.
What do you think should be done about the student loans debt crisis? Should student loans interest rates rise?