Student loan debt may not be the next bubble to burst

Ballooning student loan debt is weighing on millions of Americans. Student loan debt in the U.S. reached a whopping $1.6 trillion this year and it’s rising. An estimated 45.1 million Americans have some sort of student debt.

The threat of a student loan debt bubble has been getting a lot of buzz on the campaign trail as a handful of 2020 presidential hopefuls have proposed loan forgiveness programs in varying forms. But is student loan debt really the next bubble to burst in the U.S. economy?

“We all just assumed that this could evolve into a banking related issue i.e. the subprime mortgage related issue,” Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management, who recently penned a blog post about student loans, told Yahoo Finance’s On the Move. But that’s not necessarily the case. This time is different, he said, mainly because of the types of loans being awarded.

“[If you] look at the types of student loan debt that's outstanding, 92% of them are federal, 8% of them are private,” Mahn said. “And you look at the provisions of the student loan debt, you only have to pay off, roughly 10% of your income that goes towards servicing the outstanding debt and interest that you hold. And after 25 years with federal loans, whatever is remaining is forgiven.” 

Another sign that student loan debt may not be a bubble ready to burst — default rates. Default rates on student loans have been declining. According to the latest numbers from the U.S. Department of Education, the percentage of borrowers defaulting on their student loans has declined for six years straight.

‘Knock on effect’

While it may not be a bubble about to burst, student loan debt is concerning given its size and will likely have some negative impact on the economy. There is a “knock on effect” to all this debt, said Alicia Levine, BNY Mellon Investment Management’s chief strategist, adding that young people will not spend and contribute to the economy in ways generations earlier traditionally have.

“The people with debt like this are not buying homes. They are not first-time homebuyers which is affecting the housing market which affects GDP,” said Levine.

Americans need to re-examine the system, said Mahn. “What we really have to do is to take a step back from the topic. And think about ‘Well why do we have so much student loans outstanding?’” Mahn said, referring to the rising cost of college. “Over the last 20 years, average tuitions and total fees at public universities have tripled and average tuitions and total fees at private universities have doubled... even though there is no inflation and wages have only grown at 3% each year.”

Joanna Campione is a producer with Yahoo Finance.

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