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There are several reasons to believe that we are unlikely to see a 2007-8 style catastrophic collapse (The student loan debt crisis in scene). To begin, total student debt is estimated to be around $1 trillion (the average individual owes about $24,000; Student Loan Debt by Age Buch). This is roughly 1/10th the size of the mortgage debt that played the key role in triggering The Best Recession. Furthermore, delinquency rates on student loans are currently 10%, which is not significantly different from other forms of consumer debt. And the government supports 95% of student loans, denoting that the private sector is protected from direct economic fallout in a way that was not true in the subprime dilemma. Last and perhaps most exigent, we don't have financial institutions enthusiastically creating assets derived from pools of student loans (especially the riskiest ones) that are then traded on the stock market, thus making their cost vulnerable to sudden and violent changes of opinion.
But that doesn't mean that there aren't indebtedness. First, there is broad agreement that the delinquency rate mentioned above is understated because of the means by which repayment can be deferred (Grading Student Loans). To make subjects worse, the most recent graduates will have faced the highest costs and will be emerging into what continues to be a very poor job market. We therefore have every cause to believe that the defaults are not only understated, but they will grow. Furthermore, student debt is particularly hard to have forgiven even in bankruptcy, so that educated who find themselves un- or under-employed cannot optimism any comfort. And college does not appear to be getting any cheaper. While the causes for skyrocketing tuition vary, the phenomenon itself is undeniable (for an excellent, if concise, discussion, see: How to Get College Tuition Under Control).
What this means is that we are spawning a generation whose debt loads are already so high that they will be forced to forego the consumption necessary to create demand and employment for the rest of us - and consumers are the true job builders. We need them to spend the money that makes entrepreneurial activity beneficial, but what sort of expenditures can we expect from a recent graduate who already faces the equivalent of a home payment?! There is already evidence that this is having an impact (Young Student Loan Borrowers Retreat from Housing and Auto Markets). This is bad information for all of us.
Of course, one could rightly argue that no one forced them to go to college. They freely chose to extend their graduation beyond high-school leaving age and take on all this exonerate. But, it isn't as if they are taking out these loans to buy big-screen TVs or take Caribbean cruises. They are trying to grow what economists call human capital. They want to achieve new skills, learn new paths of thinking, and to develop specializations in particular areas of study. In short, they want to make themselves better. And, when they do that, we all achieve because we are the beneficiaries of the fact that they are more productive peoples, better informed voters, etc. I suspect that I don't need to convince anyone of this.
The plague of student debt is, therefore, likely both to lower GDP increased as it acts as a drag on the spending of those who were willing to take the plunge and reduce national human capital formation because of those who were not. It is a lose-lose proposition where people in America suffer - well, almost everyone suffer from Debt Problems.
Shockingly, it appears that one of the winners is the US federal government. Numerous recent articles have bemoaned the fact that they are set to earn a profit from student loans not only this year, but potentially into 2024 (Student loan profits to continue at least until 2024). Furthermore, the interest rates are likely to climb (Feds expected to hike student loan interest rates July 1).This is insane. Not only can a sovereign nation issuing it's own currency can never go bankrupt (see It Is Impossible For The US To Default), but one of the most useful things the pattern of government spending and taxation can do is to encourage particular activities. If we'd like people to give money to charity, we can offer a tax break for donations; if we want people to own homes, we can let them write off mortgage interest; if we want them to raise a family, we can give deductions for children, etc. We can make socially costly behaviors more expensive (smoking and drinking, for example) and socially useful ones cheaper (installing solar panels or buying a fuel-efficient car).
Surely college educations fall into the latter category. They aren't video game systems. If everyone who would like to own an XBox or who would be a particularly good HALO 3 player can't afford one, it's a shame but it's not a national problem. It makes perfect sense for an unregulated market system to determine who does (and does not) get to have one. On the other hand, we are all hurt if an individual who would make a great teacher, engineer, or accountant is prevented from developing those skills. We are hurt, too, if the cost of their education is such that those who do take the chance find themselves weighed down by debt for years to come. This is all the more ridiculous when the primary funding agency does not need the revenue.
I'm not saying that college should be free and I know that tuition is like the sticker price on a car - hardly anyone really pays the full amount. I further understand that the problem is not just the loans, but the skyrocketing costs they finance and this is surely something that deserves closer attention. All that said, however, if there were ever a place where the government should be doing more to alter the incentive structure that exists in the economy, it is here. Who is more deserving of a bailout: the banks and financial institutions whose actions created the subprime crisis or the young Americans who want to spend another four years in school so that they can become writers, engineers, entrepreneurs, teachers, software designers, nurses, architects, 2nd lieutenants, police detectives, etc., etc., etc.? After all, education is not a cost, it's an investment.
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