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Is the Near-Trillion-Dollar Student Loan Bubble About to Pop?

Student loans have been going up since the recession began--and now defaults are up too. Something has to be done, but what?

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As student loans rise, so has delinquency. Phil Izzo at the Wall Street Journal reported that 11.2 percent of student loans were more than 90 days past due and that rate was steadily going up. “Only credit cards had a higher rate of delinquency — 12.2 percent — but those numbers have been on a steady decline for the past four quarters,” he noted.

It shouldn't be surprising to anyone that student loan defaults are going up as young workers especially are struggling in the current economy. Izzo reported, “Workers between 20 and 24 years old have a 14.6 percent unemployment rate, compared to the national average of 9.1 percent recorded in July. That comes even as the share of 20- to 24-year-olds who are working or looking for a job is at the lowest level since the 1970s, before women entered the labor force en masse.”

In his Huffington Post blog, Michigan Democratic Representative Hansen Clarke noted, “This year, the average borrower graduating from a four-year college left school with roughly $24,000 of student debt, despite the grim statistic that -- according to a Rutgers University study -- only 56 percent of 2010 graduates were able to find work following completion of their studies.”

Back in July, credit rating firm Moody's Analytics warned that student debt could lead to the next economic crisis. How did student loans go from “good debt” that could be expected to pay off--Pew found that an adult with a bachelor's degree earns about $650,000 more during their career than a typical high school graduate—to a bubble that threatens the economy?

According to the National Center for Education Statistics, college enrollment skyrocketed 38 percent, from 14.8 million to 20.4 million, between 1999 and 2009. (The previous decade it had only gone up 9 percent.) This should be a good thing—except it was not accompanied by measures to make tuition affordable for working families who wanted to send their kids to school. Combined with the decline in the type of union manufacturing jobs that used to allow workers to be comfortably middle-class without a college degree, we've wound up with working-class families taking on debt to send their kids to college, which they are told will help those kids make more money.

Labor economist Mark Price told me:

“Manufacturing was a path into the middle class that didn't require a college degree but manufacturing has shrunk as a share of all employment and access to similarly high paying good jobs in the service sector typically requires a college education. One other complicating factor is that that the manufacturing that remains in this country often does require more than just a high school diploma for entry.”

As student loans are relatively easy to come by, both from the government and from private lenders increasingly getting into the game, universities have been able to keep hiking tuition without seeing a drop in enrollment. Students are still advised that student debt is “good debt,” as noted above, and that they will be able to pay it off—but the costs are rising far more rapidly than average incomes.

The Philadelphia Inquirer reported that Temple University has raised tuition every year since 1995—it's gone up 9.9 percent for in-state students. At the University of Pennsylvania (an Ivy League private university—Temple is the state school) tuition went up 3.9 percent to $42,098 a year. “Throw in a dormitory bed, meals and books, and the price reaches $57,360,” wrote Inquirer reporter Jeff Gammage.

Josh Harkinson at Mother Jones pointed out that like anything else, the bang for your buck isn't the same at different universities. Private universities have increased per-student spending by about $7,500, he wrote. But public community college spending per student has stayed flat at around $10,000—while those private college students get $36,000 spent on them. He wrote, “It should come as no surprise then that graduates of prestige schools continue to outpace other collegians.”