Much noise has been made about the growing student loan bubble and what kind of impact it will have on the economy when it goes “boom.” It is a reasonable question, but if you are thinking this is just like the housing bubble, or the tech/Internet- stock market bubble, you are wrong.

There is no doubt that the rapid spike in student loans over the past five-years has been alarming, especially since the funding and now the risk comes at the expense of taxpayers.

However, being accustomed to getting the short end of the stick when the world is turned upside down, taxpayers would loath having to pay for defaults on loans without their consent. There was a chain of events that brought the nation to this point.

Beginning with the 2008 semester loan limits that were placed on Stafford loans, putting a deep chill on private lending:

  • 2007-2008 semester 2.8 million private sector loans averaged $7,041
  • 2011-2012 semester 1.3 million private sector loans averaged $5,870

In the 2011-12 semesters, the federal government issued 93% of all college loans. The numbers are staggering and now it is a Main Street concern. According to a 2011 Pew research survey, one in five US households were holding student loans at an average balance of $23,300. The bottom line is that college is not cheap and the burden of student loan debt continues to impact Main Street and the economy.

Tuition 4-Year Colleges

All

Public

Private

1981-1982 $9,554

6,942

15,306

2011-2012 $23,066

16,789

33.716

U.S. Department of Education, National Center for Education Statistics

The administration took control of student loans, along with other large foundations including medical and financial ones, when the rug was pulled from under private lenders in 2010. The result has seen student loan debt, largely sponsored by taxpayer funds, spiking more than 50% since 2009.

Despite the burden, those screaming that college isn’t worth it must look at current and future economic reality. It is not just that college grads have lower unemployment rates; these rates are lower on significantly higher participation rates.

A study of minimum wage highlights the risk of starting college and not finishing.

Minimum Wage By
Education

% Working Minimum
Wage

Total Working Minimum
Wage

Less Than High School 9.8% 927,000
High School 3.7 980,000
Some College 4.2 1,133,000
College 1.8 260,000

This all boils down to dollars and cents. Or, I should say common sense because college grads make a lot more money over their lifetime than those who only graduated from high school. According to the study, the difference could be anywhere from $800,000 to $2,800,000.

However, there is a collection-risk concern and ultimately, something must be done to curb tuition cost. I think the key is the return of private lenders. They would certainly balk at overpaying for degrees with limited return on investment:

  • Communications
  • Psychology
  • Nutrition
  • Hospitality/tourism
  • Religious studies
  • Education
  • Fine Arts
  • Sociology

The good news is that private lenders are easing back into student loans (see WSJ graph).

Moreover, how close we are to the “bubble” popping remains to be seen. Obviously, a much more improved economy would mitigate the risk. Still, the conundrum is real. College grads are working, but newer grads are working in occupations in which they are over-qualified, and yet, we have a nation thirsting for the right kind of skills. For now, college is worth it, but I cannot say that's a given for much longer…

Disclaimer: All investment entails inherent risk. Wall Street Strategies' research seeks to assist investors in determining when to buy and when to sell to attempt to maximize profits or minimize losses. All final investment decisions are yours and as a result you could make or lose money. Wall Street Strategies, its employees and/or its affiliates and family members may from time to time take positions in the open market or otherwise with respect to the securities discussed. Wall Street Strategies, its employees and/or affiliates do not have stock ownership equal to or greater than 1% of the outstanding stock of the covered company nor does any employee of Wall Street Strategies sit on the Board of Directors of any covered company. Wall Street Strategies is not a broker/dealer, and the firm does not underwrite securities, manage assets or perform investment banking activities. The statements made herein include information obtained from sources believed to be reliable, but no independent verification has been made and we do not guarantee its accuracy or completeness. The statements made herein contain general information and do not constitute an offer to buy or sell any security.

Charles Payne is the host of Making Money with Charles Payne (weekdays 6-7 PM/ET). Click here to see more from Charles Payne.