‘Downgrade´ of student loans

Nieuws | de redactie
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 creditrating agencies make politicians and investors shiver. Standard andPoor’s decision to downgrade the excellent debt rating of U.S.treasury has triggered a stock market rally downwards bringing backmemories of the 2008 financial crisis.

Moody’s doubts on student loans

Christian deRitis, director at Moody’s Analytics, now publisheda report forecasting a dire future for studentloans. Numbers indicated that the student debt market could be thenext financial bubble to bust.

“The long-run outlook for student lending and borrowers remainsworrisome… There is increasing concern that many students may begetting their loans for the wrong reasons, or that borrowers – andlenders – have unrealistic expectations of borrowers’ futureearnings,” states deRitis in his report.

Mark Kantrowitz, financial aid expert and advisor prominent innews and politics, estimated the average student debt to around$27.200 at the beginning of 2011. A recent compromise on the debt ceiling, will raisestudents’ 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 servicecosts in North America. Since 2000, tuition costs have more thandoubled. Particularly low government support and plunging donationsmade universities fill their income gap with increased tuitionfees.

Tuition vs. Other PriceIndices

US Tuition Fee Growth


Sources: BLS, Moody’sAnalytics

Surprisingly, the trend towards a ballooning student loan markethas not stopped during the financial crisis. Private consumers forinstance started borrowing less money due to fears of not beingable to pay it back.

Tuition loans do not follow this logic. Rather the oppositeapplies. Students are afraid of becoming unemployed aftergraduation and seek extra qualifications.

The rate of unemployment of under 24 year olds lies at around15% in 2011. This is still relatively low compared to the EUaverage of 20,5%. Given the higher debt burden, however, it is moreurgent than ever for graduates to find employment .

Student Loan Balances KeepGrowing

US Loan Balance Growth

Sources: Equifax, Moody’sAnalytics

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