Will Growing Student Debt Cause a National Crisis?

student loan debt collapse

Depending on whom you ask, the United States may or may not have a student loan debt crisis looming on the horizon. In March of last year, total debt hit the much-publicized trillion-dollar mark, and this January, the LA Times reported the FICO Labs findings that the student-loan delinquency rate has increased to 15.1% in the last three years, up from 12.4%. But does this increase mean anything in the larger scheme of our national finances?

There’s a very strong argument made by economists that the vast amounts of money borrowed by college students (combined with the lack of opportunities available for recent graduates) indicates there will be an even greater number of student loan defaults soon to hit the overall economy. The basic premise is similar to what happened with the mortgage crisis. Many people lost their homes and the whole economy was made turbulent by rapid loss of value in the housing market, which set off industry-wide declines and increased unemployment. Student loan defaults have been theorized to cause a similar catastrophe.

“This situation is simply unsustainable and we’re already suffering the consequences. When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality,” said Dr. Andrew Jennings, FICO’s chief analytics officer and head of FICO Labs.

On the other hand, while a trillion-dollar debt is nothing to sneeze at, the way some of the individual student debt stories have been reported in the press might be lending to an air of despair and fatalism for the whole situation. Some news articles profile a student or two that have somewhere between $50,000 and $100,000 in debt and have graduated only to find themselves working three minimum wage jobs just barely pay rent, buy food and pay back student loans. The average student debt load, however, is not that high. In an article published by the Federal Reserve, the real figure was pegged at $23.3K per borrower.

The Huffington Post published one of these flashy debt stories about a law school dropout who owes over $60,000 and was trying to raise money by selling the right to rename him on eBay. These stories may generate a lot of interest online, but they’re just one type of example in a very diverse and complex sample group. Is this type of exaggeration in the media making the situation seem like an impending disaster that won’t truly come to fruition?

Yes and no. While the amount of total debt is a daunting number, it’s the other factors in combination with these loans that is making the situation so dire. A college degree is increasingly seen as a necessity to gain employment. More and more individuals have been able to obtain these degrees in the past decade, so there’s a higher competitor pool for every opportunity for employment. The many individuals who have been laid off during the economic crisis have returned to school, resulting in both increases in their employability and in their debt. The question is whether or not there are enough employment positions available by the time they finish school and accrue these debts. If not, it’s just a matter of time before the bubble, well, bursts.

Recently, the New York Times reported law school applications are at a thirty-year low, due to a number of factors. One of them is accurate reporting online about how the number of jobs in the legal field is smaller than the number of law school graduates, in addition to the high cost of law school. And while this is a legitimate concern, others, like the emergence of blogs detailing the perils of taking out large debts to attend lower-tier law school, are examples of how the media is exaggerating (and perhaps, harming) the economic situation caused by student loan debt.

Don’t forget that there are 12 million students who borrow annually to help pay for their education. This is a huge sample size. There’s a possibility that, if enough of these adults budget responsibly and make positive financial choices while the sluggish national economy slowly ticks up, we can avoid a student debt loan crisis altogether. However, such a disaster is very possible. We are emerging from the worst recession in decades, and there is legitimate fear that the accrued debt will do serious damage to the economy in the upcoming years – possibly causing another recession.

And there still remains the potential for student debt to cause recent graduates to spend most of their income on paying their loans, which means they won’t have money to save for a down payment on a home. Some of them also probably will not have enough to make mortgage payments, so they will have to delay home ownership for many years. In other words, they will be paying a steep price in their young adult and even middle-age years in opportunity cost, because they will not have built up equity in homes from the time they were twenty to fifty. All of these choices, and all of these shifts in cultural and behavioral norms, will have an impact on a greater national economy.

Angie Picardo is a staff writer for NerdWallet. Her mission is to help students stay financially savvy and rebuild their credit with NerdWallet’s best credit cards for bad credit.