Student debt: the next bubble to burst?

Student debt becoming a huge economic burden on society

 

 

During this fall’s legislative session the provincial government introduced legislation to simplify the student loan application process. Included in the legislation was an amendment to the “Infant Act” which will allow students who are minors to get a student loan without a parent or guardian’s guarantee.

These changes, designed to make student debt easier to access, are occurring against the backdrop of a looming crisis which economists fear may be the next bubble to burst: student debt. In the U.S., student debt will reach an historic high of $1 trillion dollars this year, surpassing credit card debt for the first time. In Canada, student debt is also at a record high of $15 billion.

So why aren’t we making post-secondary education more affordable instead of making student debt easier to obtain? Given the continued pressure put on young people to get a post-secondary education and the increasing costs of that education, making student debt easier to access is simply exacerbating an already unsustainable situation.

But, isn’t it ultimately the responsibility of students to manage their own debt load?

A recent study by the BC Securities Commission on student financial literacy concluded that: “many students currently leaving high school – and many adults – have weak financial skills and little knowledge of the financial realities they will face. As a result, they make costly mistakes, and are more vulnerable to scams and frauds.”

The study reveals that students have unrealistic expectations about their future earnings and their potential to own their own home. On average, high school students expect to earn $90,000/year in ten years, three times the actual average earnings of 25-29 year olds with post-secondary degrees. Fully three quarters of them also expect to own their own home within ten years, but only 42 per cent of 25-29 year olds are homeowners.

Economists point out that student debt is already a drag on the economy, even before the bubble bursts. Saddling young people with student debts prevents them from participating in the economy during their early years in the workforce when they should be setting up their first apartments or homes. It also forces many young people to return home and take lower wage jobs simply to make payments on their student loans – effectively negating the benefits of their very expensive degrees and diplomas.

If students have unrealistic expectations of their earning potential, is government acting responsibly by making it easier for them to access debt?

– Bob Simpson