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Student Loan Debt Market: Too Big To Fail

March 5, 2013 by

GMAT BlogOn Wednesday, February 27, 2013, the student loan ombudsman at the recently minted Consumer Finance Protection Bureau (CFPB), Rohit Chopra, declared yet another systemwithin the U.S. economy ‘too big to fail.’ While Sen. Warren is grilling Ben Bernanke on what exactly the Federal Reserve is doing to remedy the unacceptable influence big banks wield on the health and state of our economy, the student loan debt market, comprised of public and private lenders, has shot past $1 trillion and continues its relentless climb.

Last year, students borrowed $117 billion from the federal government alone—our most inexpensive and forgiving education creditor. [Although, if our ever-competent and productive legislators [sic] fail to reach an agreement by July 1st of this year, interest rates on subsidized Stafford loans will be hiked to 6.8%.]But, is this any surprise? The cost of college is increasing at a rate of 8% per year, five times the current national rate. This tuition inflation rate translates to a doubling of tuition every nine years. Of course, tuition is nowhere near the entirety of the cost of higher education. In fact, an investigation by Business Insider estimates an average of $70,000 in additional costs above the tuition sticker price, and that is just an undergrad number.

Some are lucky enough to be able to cover the cost of undergraduate and graduate degrees, but more are unable to do so without incurring debt.As you look toward your MBA degree and the multi-faceted investment it involves, take the time to objectively evaluate where a graduate management degree from your targeted institution(s) have the potential to take you. Do not sell yourself short or the institution, but approach this analysis soberly. It may well be that you conclude that you need to set your sights higher and, therefore, incur even more cost in order to track your future in the direction it needs to go. If you have the drive and are willing to make the commitment to do what it takes to get into a top tier school, then go after it. If that does not make sense for your career path and goals, however, then get what you need at less cost.

The numbers surrounding student loan debt are terrifying, both macro and micro (I speak from experience here). But, just as a fledgling company needs investment to grow and prosper, so do individuals. If you decide to take the plunge, then go all in. Sign up for a GMAT class, take trips to universities, apply for scholarships and grants, accept loans if necessary. After all, where is the reward without the risk? Just be sure to do all of these things prudently and with a clear head. Do not be duped into a system that will not reward your risk.Defaults will hurt us all.

 

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