In this question, we examine why the US has such a huge amount of student loans.

Question

In this question, we examine why the US has such a huge amount of student loans. Briefly explain why there is a huge demand for college education. Why is it so easy for students to obtain a loan? Explain how student loans are securitized in a diagram. Explain the relationship between student loans and college tuition. Given that there are more and more college graduates entering the job market each year, how would this affect the unemployment rate and labor force participation rate? Suppose the default risk of student loans increases, how would this affect the interest rate? Illustrate your answer in a diagram. In the long run, how would the default on student loans affect the labor market and economic growth of a country?

Explanation / Answer

Multiple questions asked.

First 4 are answered below.

a)

Due to increasing demand for skilled labor, more and more youngsters are preferring to get college education so as to get better well-paying jobs in the job market.

b)

Generally, loans are given out by banks only after checking the credit record of the person and to make sure whether the loan taker will be able to repay the loan in future.

In case of student loans, the American banks started giving out loans without doing a proper check on their credit history in order to increase their loan payouts, thereby leading to a huge pile of loans given out.

c)

Higher the student loans, higher the students enrolled in colleges, thus higher the demand for college, and thus higher the college fees charged.

d)

Since the number of graduates (due to ease of availability of student loans) has increased dramatically, it is unable to match the increase in the jobs created in the job market, thereby leading to higher unemployment.

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