Bursting Your Bubble

Bursting Your Bubble

As a former history teacher I am all too aware that history has a tendency to repeat itself.  In fact, it was one of the things that fascinated me most about the subject. Amazingly, some of those same characteristics apply to the world of personal finance and the economy as well.

As a millennial who was impacted by the 2008 real estate meltdown, I am always on the watch for the next potential bubble to burst. As I view the current landscape of student loan debt in America what I see is a cost bubble, (the price of tuition has gone up over 600% in the past 30 years)1, profit based institutions spending millions on marketing their products to financially unsophisticated borrowers unaware of the debt risk they are taking, government leaders  promoting the idea that a 4-year degree is something all Americans should have, and a culture of entitlement that says you shouldn’t have to save money or make sacrifices for the things you want. Any of this sound familiar? If you ask me, those ingredients are the very same ones that proved to be a recipe for disaster less than ten years ago.

A recent survey measuring college students understanding and feelings about their student loans has strengthened my fear that another debt crises may soon be looming. According to the survey a staggering 80% of college students did not know the current interest rate of their student loans. And 79% of them could not identify the current repayment term of that loan. The danger of this level of financial ignorance is obvious.  We saw it painfully play itself out in 2008 when people took on debt they couldn’t afford, under terms they didn’t understand, with people who couldn’t be trusted. The financial devastation that resulted threatened the bedrock foundations of our economy. Sadly, it would appear millennials failed to learn the lessons that the 2008 crisis should have taught them about the danger of certain types of debt. Instead federal intervention in the crisis had the unintended consequence of teaching young people that if you mess up bad enough Washington will come to your rescue with a bailout. As a result, nearly half of all students now believe their student loans will be forgiven after graduation.2

Knowing that I am the eternal pessimist, I fully acknowledge the situation may not be as dire as I fear it is. The economy and the stock market may continue its upward trend and as a result unemployment may stay low, and wages for graduates might increase in a way that allows repayment of these loans without default. But this much I do know, saddling young people with mountains of debt prior to even beginning their careers will delay their ability to do things like buy a house or have children, and as a result the entire economy will be impacted.  Fortunately for us, our great nation also has a history of overcoming huge obstacles. In that at least, let’s hope history does continue to repeat itself.

(Past performance is no guarantee of future results. Advice is intended to be general in nature.)

1: https://lendedu.com/blog/financial-aid-awareness-month-survey/

2: https://nces.ed.gov/fastfacts/display.asp?id=76

March 29th, 2017|Categories: Personal Finances|