Thursday, October 18, 2012

The Student Loan Crisis Gets Worse

According to a new study, the average student who graduated in 2011 had $26,600 in student loans and 37.8% of graduates worked in jobs not requiring college education. The default rates hit a 14-year high. New Hampshire students had the highest debt load at $32,440, followed by Pennsylvania, Rhode Island and Connecticut; Utah had the lowest at $17,227, followed by Hawaii, California, Arizona and Nevada. 96% of students in private for-profit universities took out student loans borrowing 45% more than students at other colleges. Medical students debt levels are over $100,000 with students choosing lucrative plastic surgery over obstetrics to be able to pay that off. The total student debt has surpassed $1 trillion. Why is this happening?
Explanation 1. Economic crisis, governments slashing budgets lead to rising tuitions. Loan programs are complicated and students don't even know how much they owe.
Explanation 2. Overabundance of student loans at low cost leads to mispricing of default risk and misallocation of investment into what in Utah someone called degrees to nowhere", instead of into STEM fields (science, technology, engineering and math). Universities and for-profit colleges soak up the cash. Costs rise. Notice the parallel to the subprime housing crisis. Scary since the student debt bubble has not burst yet.

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