E U.S. Student Indebtedness Will Affect Future Wealth Accumulation

While the global financial crisis may be fading from memory, the roots of the next one might already be taking hold. Even though there is no imminent worry about a new global financial crisis, nonetheless there is also little doubt that in some sectors of the advanced economies the debt situation is much larger than it was when the financial bubble burst in 2008.

Over the past ten years, extremely low interest rates in the advanced countries (particularly the United States, Europe, and Canada) made it attractive to take on debt.

Currently, the main concerns focus on three sectors of indebtedness — student debt in the United States, increased corporate borrowing in the advanced economies, and emerging market country indebtedness.

The financial burden on post-secondary students in the U.S. has increased sharply since the 2008 meltdown. The amount of American student debt currently stands at about $1.5 trillion, more than double the amount which existed ten years ago when the financial crisis hit.

Student debt in the U.S. is now the second-largest category of household debt, after mortgages. Moreover, outstanding student debt is growing faster than money wages, suggesting future problems to come.

What caused the sharp escalation in student borrowing? The financial meltdown played a big role. Public colleges and universities, which were penalized by state government budget cuts, were forced to increase tuition fees.

The drop-in house prices also made it harder for families to tap into their home equity to pay for tuition. As a result, the financial burden shifted to students, who took on heavier debt loads to pay for school.

Roughly 11% of student debt was classified as delinquent last year, representing a substantial increase since 2008.

In July of 2017, the Federal Reserve Bank of New York published a report that examined the link between rising tuition, swelling educational debt and declining home ownership among Millennials.

The study found that 11-35% of the decrease in homeownership among 28-30 persons between 2007 and 2015 was attributable to tuition hikes and increased debt.