The next crisis to avoid is in student loans

It’s not entirely clear what the implications of this ballooning debt will be, as outstanding student loans approach the $1 trillion mark this year. However, economists have suggested that high student debt combined with a weak job market, particularly for younger workers just starting out, has already added pressure onto the broader economy. And it will likely have an impact on future growth.

Ever since U.S. consumers began owing more on their student loans than their credit cards a couple of years ago, economists have kept a closer watch over whether soaring education debt could be America’s next bubble to pop.

For Federal Reserve Chairman Ben Bernanke, the issue apparently strikes close to home. At a Congressional hearing recently, the central banker told lawmakers that his son, who’s in medical school, will likely rack up $400,000 of student debt upon graduation. The rapid growth of education loans requires “careful oversight” from regulators, he added.

There’s reason to worry. After all, the latest outstanding student loan balance has risen to $870 billion – more than the total credit card debt (at $693 billion) and what people owe in car loans (at $730 billion), according to a report released Monday by the Federal Reserve Bank of New York.

More importantly, the rate of delinquencies may be higher than previously thought, the Fed’s economists noted. That’s because calculations that the central bank usually follows don’t take into account the proportion of federally guaranteed loans that typically don’t require repayment while borrowers are still in school. It also doesn’t consider those loans that can be deferred for up to six months upon graduation. If such groups were excluded from the tally, the percentage of borrowers with past-due balances as of last summer would jump to 27% – about double the 14.4% (or 5.4 million borrowers) under the Fed’s more conventional measure. And as many as 47% of student-loan borrowers appear to be in deferral or forbearance – a temporary option that many unemployed, underemployed or those facing financial hardships often chose.


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