There's no doubt that we're all still a little sensitive when it comes to the economy. Although it's been nearly four years since the start of, what we now call, The Great Recession, the world still hasn't let down its guard. The new warning making its way through the financial media is the rising student loan burden. Some believe that this could bring down the economy in much the same way as the 2008 and 2009 mortgage crisis, but is that true? (For related reading, see Student Loan Debt: Is Consolidation The Answer?)

For generations, young people have heard that the only path to success is through a college education. College remains the accepted path for 68.1% of high school graduates, according to the Bureau of Labor Statistics.
For most students today, student loans are the way to pay the expenses of a higher education. The average student loan debt for a college student in 2010 was $25,250, up 5% from the previous year, according to a study by the Project on Student Debt. For the first time in history, total student-loan borrowing for one year surpassed the $100 billion mark in 2010, making the total outstanding debt more than $1 Trillion.

Some believe that the problem will continue to get worse. Over the past 50 years, the rate of college tuition inflation has ranged from about 6 to 9% annually, sometimes twice the normal rate of inflation. With college becoming more financially out of reach and the economy largely failing to put all of the college graduates to work, experts believe that more and more people will be unable to pay these loans. (For additional reading, see Keeping Your Student Loans In Check.)

The problem doesn't stop there. Current laws don't allow student loan debt to be written off by bankruptcy proceedings, regardless of how bad a person's financial situation becomes, so graduates who are bankrupt will likely continue to pay on their student loan debt. Some students with more than $100,000 in debt may pay the equivalent of house payment each month for sometimes more than twenty years.

Economists fear that as this problem continues to grow, traditional purchases like homes and other economy-stimulating activities could be largely stifled, impacting the growth of an already fragile economy.

This problem is much more than a theory. A recent survey found that around 50% of bankruptcy attorneys reported significant increases in clients who list student loan obligations as a significant financial burden. Another survey of the class of 2005 found that one out of every four became temporarily delinquent or haven't paid for a significant period of time.

The Fix
Bankruptcy attorneys believe that the only way to fix the problem is to allow for student loan debt to be discharged in the same way as credit card or other debt through bankruptcy proceedings. Some believe that this would be just another taxpayer bailout of the student loan industry but since a large portion of debt is through government agencies, much of the debt is already held by taxpayers. Others believe that college tuition inflation needs to be brought under control, but there is little hope for that in the near future.

The Bottom Line
There's no doubt that the student loan system is in desperate need of reform but comparing it to the mortgage crisis may be inaccurate. Although the total amount of outstanding student loans now stands at about $1 trillion, that number is small compared to the roughly $13.5 trillion in outstanding mortgage debt. (To learn more, read Student Loans: Paying Off Your Debt Faster.)

Related Articles
  1. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  2. Personal Finance

    Top Universities for Getting an MBA Abroad

    Going abroad for an MBA can add cachet when it comes time to get a job.
  3. Personal Finance

    College Students are Failing Financial Literacy

    Financial trends among college students are a cause for concern, prompting a renewed emphasis on financial literacy.
  4. Credit & Loans

    10 Ways Student Debt Can Destroy Your Life

    If you're getting a student loan, think critically about how you will manage your loan. Student debt could have a profound negative impact on your life.
  5. Credit & Loans

    Explaining Equated Monthly Installments

    An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
  6. Professionals

    10 Must Watch Documentaries For Finance Professionals

    Find out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
  7. Budgeting

    Top 10 Ways College Students Can Save Money

    College costs are soaring, but fortunately, there are several ways for college students to save money - and some are quite painless.
  8. Stock Analysis

    Why Is GE Selling Some of Its Subsidiaries?

    Learn why GE is selling off a substantial amount so it does not have to comply with increased government regulation in the wake of the 2008 financial crisis.
  9. Personal Finance

    8 Ways to Find Cheap Textbooks

    Textbooks are so expensive. What are the tricks to find cheaper books?
  10. Budgeting

    Best 5 Money-Saving Tips to Get out of Debt

    Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
  1. Student loans, federal and private: what's the difference?

    The cost of a college education now rivals many home prices, making student loans a huge debt that many young people face ... Read Full Answer >>
  2. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  3. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  4. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  5. What are the best MBA programs for corporate finance?

    Opinions vary based on which publications you consult, but the best MBA programs for a career in corporate finance are at ... Read Full Answer >>
  6. Do negative externalities affect financial markets?

    In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!