As millions of students and their parents are preparing for life after commencement, they’re also preparing to deal with massive student loans. Increasingly, people are concerned about the student debt situation brewing on college campuses. The present state of student debt is not a pretty picture.
According to a report published by the New York Federal Reserve Bank, college students are borrowing more than ever and debt delinquency is on the rise. Student debt almost tripled between 2004 and 2012 and is now just over $1 trillion. In fact, student debt is the only kind of household debt to rise during the Great Recession and is now second only to mortgage debt in magnitude. At the same time, for all age groups the share of borrowers who are more than 90 days delinquent on their student loan repayment has almost doubled.
Some, like Federal Reserve Chairman Ben Bernanke, claim that student debt is not inflating a higher education bubble that will cause a financial crisis, because the vast majority of student loans are backed by the U.S. government. The taxpayers are on the hook and not the banks, so banks will not be in financial distress if students default.
Bernanke’s claim is revealing. It’s clear that he thinks that the financial system is the economy. It seems that if the financial system is afloat, everything is okay. Such reasoning ignores that what helps people achieve their ends is not money per se but the actual producer and consumer goods that are produced throughout the social economy.
Alas, investment made possible by subsidized loans of newly created money contributes to an unproductive use of resources. Thus the economic problem with government-guaranteed student loans. Consider:
Read More at OfficialWire . By Dr. Shawn Ritenour.