Is student debt the next financial bubble?

Moody’s credit rating agency warns that “fears of a bubble in education spending are not without merit.”

Their new report uses entirely U.S. figures, but considering that the average amount of student loans owed by university students in Canada is similar to the amount owed by U.S. students upon graduation, ($27,000 versus $23,000), Canadians may worry too.

Moody’s argues that student loan lenders didn’t tighten their rules during the recession, unlike lenders in all other sectors. In fact, the growth rate in the total amount loaned to students continued to grow by 10 per cent per year. That’s despite the fact that the number of delinquent loans continues to grow too, while job prospects remain low. How will students be able to pay back all that money if they can’t find work?

Here’s an excerpt of their argument. For the full report, click here.

“The cost of tuition and fees has more than doubled since 2000 outstripping the inflation rate across all goods as well as the growth rates of energy, housing and healthcare costs…. With the cost of education continuing to rise rapidly, the value of schools’ endowments still well below their peaks, and state funding to universities being cut, students are being asked to shoulder an even larger share of tuition and fee increases.”

“Borrowers and lenders alike hope that the higher income resulting from the human capital investment justifies the cost of the loan. This has not been the case for recent graduates thus far…”

“Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.”