Why U.S. student loans are not the next financial bubble | Young ...

In case you missed it, U.S. student loans are now worth more than the value of auto loans and credit card debt in that country.

This has naturally led many people to ask whether this is the next great bubble.

Over the past decade, student loan debt has quadrupled in the United States, and now totals roughly US$900-billion, or 6% of that country?s GDP. But Paul Ashworth, U.S. economist at Capital Economics, says even given the meteoric rise of student debt, he does not believe it represents a threat to the U.S. financial system.

?Half of the value of existing student loan debt is owed to the Federal government and, following a recent change in the law, the government is now responsible for nearly all new loans,? he said. ?Under those circumstances, it is hard to see how even a severe rise in student loan defaults could have any systemic impact on U.S. financial institutions.?

Mr. Ashworth also notes that although the amount of student debt is substantial, it is not only a small piece of household debt in the United States. Outstanding household debt totals US$13.4-trillion in the U.S. (as mentioned above, student loans amount to US$900-billion). The majority of that is comprised of mortgage debt.

While Mr. Ashworth notes that students can obviously default on loans and pose a threat to the U.S. government, it is much harder for students to default on their loans than homeowners can on their mortgages.

?It is much harder for borrowers to default on student loans since they can?t even be discharged via bankruptcy,? he said. ?In addition, the Federal government has some very wide-ranging powers to recoup losses.?

One threat student loans do pose is potentially hampering consumption down the line. Students now graduate with an average debt of US$21,500 in the U.S., equivalent to more than 10% of the median price of a home (US$190,000).

Mr. Ashworth nevertheless concludes that at the moment, student loans do not pose a threat to the U.S. economic recovery or to the country?s financial sector. But he cautions that could change as time goes on.

?The rapid growth in student loans is a concern that will need to be monitored closely, particularly as there is no reason to believe that growth rate will slow down any time soon,? he said.

Source: http://business.financialpost.com/2012/08/13/why-u-s-student-loans-are-not-the-next-financial-bubble/

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