The Student Loan Bubble Ain’t Popping

The student loan bubble doesn’t appear to be getting any smaller, which means trouble for our supposed economic recovery. While the stock market has been hitting all-time highs in recent weeks, so has total student loan debt in America. It’s hard to even find a reliable number other than the oft-repeated “$1 Trillion+” mark that we crossed in 2012, but it’s fair to assume that the weight of our student loans are definitely holding us back.

Yahoo recently spoke to this fact in an article talking about how the student loan debt bubble is ruining the economy, holding people back from both the housing and auto markets, leading to far less purchases of new homes and cars. It’s hard to believe, but before the economic downturn those with student loans were actually more likely (far more likely!) to purchase a new home than those who had none.

Student Loans Spurred Mortgages

In fact, in 2008, people with student loans were 14% more likely to buy a new home than were those who weren’t participating in the biggest debt bubble in history (student loans have far exceeded credit card debt, which was the previous record holder). But as the economy soured and people were forced to tighten their spending habits, what do you think was one of the first things to stop happening?

We might not be able to get up and get to work without our morning Starbucks, but the Jones’s started living within their means when it came to overextending themselves on the incredibly expensive, multi-hundred thousand dollar purchases that are new homes.

Building homes and remodeling them is basically the thing that powers our economy, putting construction workers, materials suppliers and retail store associates (think Home Depot, Lowes, Hardware Stores, etc.) to work, so when home building and remodeling slowed, a huge swath of the population felt the effects.

Student Loans Create New Cars

But home building and buying wasn’t the only thing affected by the student loans bubble; purchases of new cars reacted in much the same way. And you can take it from me, because I experienced the drop in auto sales first-hand.

Way back in 2007, I was working for an amazing car dealership in San Diego (I won’t name it specifically, but let’s just say that it’s owned by the local NASCAR home-town hero), and even though we were doing better than the rest of the SD dealerships of the same brand, new car sales weren’t growing like we had all been expecting them to.

What was going on? As the economy slowed, and more people had trouble finding jobs, more and more of those destitute job seekers went back to school looking to “advance their careers”, “develop relevant job skills” and “improve their chances of being hired” with expensive new credentials that weren’t only doomed to fail them in their job hunt, but also guaranteed to add to the growing college loan bubble that had already been generated by far too easy access to student loan money.

New cars sales stalled, manufacturers shut down plants, fired assembly line workers and closed down dealerships across the country. And this wasn’t limited to the dealership or car-maker that I worked for – it was happening industry wide.

Things got worse, when in 2008 the same trend line reversed itself in auto buying just like we wrote about above for home buying – those who had their own personal student loan bubbles had previously been more likely to buy a new car than those without student loan debt, but now things reversed, and people with student loans decided that they didn’t need to get a new car every three years.

What Comes Next?

Honestly, it’s hard to say, and I follow this space closely. With more and more people going to college each year, a bigger student loan debt bubble by the day, rising interest rates (it’s got to happen at some point…), and no real economic growth, I’m pretty pessimistic about the near-term fate of our economy.

However, it’s not all bad, because it does appear that some people are catching on to the college loan scam, the false promise of a four year diploma, and the availability of free, applicable and far more valuable educational training offered by websites like the Khan Academy or Code Academy, I’m holding out hope that the student loans bubble growth should at least slow down at some point in the long-term future.

And maybe, if we could stop burying ourselves in college loan debt, then perhaps we can get back to being good Americans and start buying new homes and cars again.


Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt in 2011, where he offers advice, tips and tricks for paying off student loans as quickly and affordably as possible.

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