ScienceGuide - ‘Downgrade´ of student loans

‘Downgrade´ of student loans

12 augustus 2011 - Financial experts predict that the U.S. student loans market may be the next financial bubble to bust. "The long-run outlook for student lending and borrowers remains worrisome," according to a report by Moody's Analytics.

Fitch, Moody´s, Standard and Poor's - the names of these credit rating agencies make politicians and investors shiver. Standard and Poor's decision to downgrade the excellent debt rating of U.S. treasury has triggered a stock market rally downwards bringing back memories of the 2008 financial crisis.

Moody's doubts on student loans

Christian deRitis, director at Moody's Analytics, now published a report forecasting a dire future for student loans. Numbers indicated that the student debt market could be the next financial bubble to bust.

"The long-run outlook for student lending and borrowers remains worrisome… There is increasing concern that many students may be getting their loans for the wrong reasons, or that borrowers - and lenders - have unrealistic expectations of borrowers' future earnings," states deRitis in his report.

Mark Kantrowitz, financial aid expert and advisor prominent in news and politics, estimated the average student debt to around $27.200 at the beginning of 2011. A recent compromise on the debt ceiling, will raise students' debt burden even more.

Rising tuition and crisis woes

Reasons why this bubble came about are manifold. For starters, tuition fee costs have risen faster than any other goods or service costs in North America. Since 2000, tuition costs have more than doubled. Particularly low government support and plunging donations made universities fill their income gap with increased tuition fees.

Tuition vs. Other Price Indices

Sources: BLS, Moody's Analytics

Surprisingly, the trend towards a ballooning student loan market has not stopped during the financial crisis. Private consumers for instance started borrowing less money due to fears of not being able to pay it back.

Tuition loans do not follow this logic. Rather the opposite applies. Students are afraid of becoming unemployed after graduation and seek extra qualifications.

The rate of unemployment of under 24 year olds lies at around 15% in 2011. This is still relatively low compared to the EU average of 20,5%. Given the higher debt burden, however, it is more urgent than ever for graduates to find employment .

Student Loan Balances Keep Growing