Student Loan Deja Vu

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  • Topic: Debt, College tuition, Education finance
  • Pages : 6 (2467 words )
  • Download(s) : 52
  • Published : May 8, 2013
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In the news recently there has been a lot of hype about student loans and student debt, along with worries about the climbing costs of college tuitions. This hype is leading a lot of people in the financial world to believe that student loans are in fact the next “bubble” of sorts that our world is going to have to face—and it’s only a matter of time until we feed the bubble too much and it pops. The most recent bubble that some people in the United States are still recovering from is the housing bubble, which caused the collapse of the financial markets in 2008. The government was responsible for giving (millions) of dollars of loans for mortgages for homes, and in a similar fashion is doing so for college tuitions. Could this similar pattern of lending lead to a similar result?

Obviously if another bubble popping is looming in the future of the United States, if it is at all possible to prevent it that would be ideal. Therefore the eventual conclusion of this research would be to hopefully come up with concrete similarities and differences between the two “bubbles”, and to eventually propose alternative methods to what the government is doing now in order to prevent a similar outcome as 2008. The main sources being used to support this research are articles from the time leading up to the housing crash, as well as current articles about student loans and college tuition. Also, I concentrated a lot on US Census data detailing how the government allocates federal loans.

The most important things to take into consideration when comparing the two points in time aren’t necessarily inflation, but rather the trends and overall volume and sentiment—why people have been taking out these loans, and why they continue to keep taking out these loans in larger volumes. The reason for taking out mortgages is one that will always persist—people need homes. However, leading up to 2006 the crisis arose when people were taking loans more than they could afford, and living above their means. Currently the student loans that are being taken out are all necessary (both to the economy and to individuals), and there isn’t a high range in median cost—so most of these loans will be for around the same amounts. Besides these differences, I looked into the backgrounds of both of the markets and tried to come up with as many similarities as possible.

The housing market had seen a steady increase in the prices of houses for a substantial amount of years, which lead to many American homeowners investing in real estate with money they didn’t have, with the intention of paying off their loans in the future when their houses were worth more. However, the incline of housing prices did not last forever, and similar to any macroeconomic business cycle, the prices discontinued their upward incline. This was where many Americans were taken off guard—many lending companies at this time had made it seem that the prices would continue climbing, so eventually homeowners would be able to pay off their expenses. More factors were involved in this situation with regards to the collapse of the financial markets at this time—factors like faulty credit, unemployment, etc. However, this market lead to a popping bubble, so studying the trends leading up to the time could perhaps provide insight to what may happen with student debt now.

Firstly, I read through US census data about how the government supposedly describes “need” and “poverty” when it comes to housing. This article was helpful in detailing how the government generally goes about distributing loans—there are numerous formulae and procedures in order to determine a citizen’s ‘poverty’ level, and it is by this level that the government would determine how to give a loan. http://www.census.gov/hhes/povmeas/methodology/supplemental/research/SPM_HousingAssistance.pdf

The upward trend of the prices of houses in the United States created a tempting investment opportunity for regular Americans who were...
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