4 Ways to Avoid the Student Loan “Bubble”

by AJ Pettersen · 5 comments

The crippled United States economy has had a number of “bubbles” burst over the past 15 years. It started with the dot com industry in the late 90s and was followed by housing market bursting in the Mid 2000s. Many experts believe that student loans are next. The warning signs are evident: Going to college is gaining popularity, college tuition is paid for mostly with borrowed money and there isn’t a lot of research done to see if the recipients of the loans are a good fit. These are similar to the signs that we saw with the housing market as banks were giving out loans to just about anyone, which increased the number of houses being bought by unfit mortgage recipients.

How to Avoid Being a Victim

If you are a college student or a recent graduate there are a number of ways to avoid getting caught up in the student loan “bubble”. Unlike mortgages, student loans will not go away if you declare bankruptcy. There is really no way to back out of student loans, as they must be repaid. There are however a number of options to avoid defaulting on your student loans.

1. Avoid Taking Out Loans as Much as Possible
Student loans carry high interest rates. The new government subsidized and unsubsidized loans are currently at 6.8%, while the PLUS loans stand at 7.9%. If you must take out loans, it would be smart to look at private variable rate loans that are based on the LIBOR because this rate is extremely low given the current economy. Paying upfront for tuition as much as possible is important because it will keep your financial burden lower when you graduate.

2. Seek Out Scholarships
If you think you will have trouble finding ways to pay for college, scholarships are a great option. Apply for as many as you see fit. They may take time to fill out, but in the end it can save you a great deal.

3. “Pay As You Earn”
President Barack Obama is well aware of the impending student loan crisis. Congress has passed a bill to amend the current income contingent plan. This bill was supposed to take effect in 2014, but the President has said he will make an executive order for the changes to be expedited for 2012. Under this plan the amount of monthly income you will be required to pay will go from 15% to 10% and you will be forgiven whatever is left in 20 years rather than 25. This plan is an excellent option if you are struggling to make payments because of a low income.

4. Avoid College All Together
This may sound like an extreme idea, but it has been thrown around by some very intelligent people in the past few years. Peter Thiel, the co-founder of PayPal, announced this year that his company would be giving away $100,000 to 24 students under 20 to drop out of school and start their own company. Ideas like this question the value of higher education because it makes people wonder if it is necessary for innovation.

What To Do

The student loan “bubble” is an impending issue that will continue to draw press throughout this year and into the next. What to do as an individual is up to you. Being aware of your finances and having a plan and sticking to it will be vital to your financial success going forward.

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  • Garry kerr says:

    Student loans will not go away if you declare bankruptcy. There are however a number of options to avoid defaulting on your student debt. Scholarships are a great option. They may take time to fill out the applications, but in the end it can save you a great deal.

  • Kent says:

    15% pay as you earn is way to much, difficult to avoid taking out loans 5% is more resasonable.

  • Brent Pittman says:

    I am for #4 in most cases (not brain surgeons of course.) For my kid I might encourage a combo Jr college and start-up company.

  • KC @ PsychoMoney says:

    I think we will start hearing a lot more about this bubble going forward, as if we are not hearing enough already. But it has really gotten out of hand in more recent years.

  • Mac says:

    I have an issue with #1. I agree that avoiding taking out loans is smart, but recommending private, variable rate loans? Yes the rates may be cheaper now, but at best you’re probably talking 4-5% and that probably assumes a co-signer with stellar credit. And with a lot of these loans having 10-20 year repayments depending on how much you take out (not to mention the 4-years you defer payments while in school [if the private loan will allow this]), the variable rate opens the door to the potential for huge fluctuations. Kind of sounds like the whole adjustable-rate mortgage environment, and we remember how that blew up….

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