Student Lending: Wall Street’s Next Bubble?

If it is, it will -- surprise, surprise -- disproportionately affect black people.

Thinkstock Images
Thinkstock Images

Amanda Winston, a junior at Temple University in Philadelphia, juggled three jobs and an unpaid internship this summer in an effort to keep her head above water financially while continuing to make key contacts in the public relations field that she hopes to call her own once she graduates.

Tiffany Black, an aspiring veterinarian and biology major at City College in New York, wants to start paying off a student-loan bill that she anticipates will be in the tens of thousands of dollars before she completes her education. But she has not been able to land a job since she started looking in May.

Cynthia Jones, a divorced mother of three and a part-time student at John Tyler Community College, just outside Richmond, Va., is confident that her studies will lead to the higher-paying job of her dreams — and allow her to pay off more than $14,000 in student loans.

“I’m sure I will be able to pay off my loans when I finish school,” Jones said. “There are payment-plan options. They really help you.”

A Looming Crisis

But the sheer number of students with outstanding loans has credit-rating firm Moody’s Analytics worried. Winston, Black and Jones are just three of the approximately 35 million people nationwide who have outstanding federal student loans.

As of March 30, outstanding student loans totaled about $805 billion, according to the U.S. Department of Education, which administers the loans. Rising tuition costs, a soft job market and troublingly low graduation rates at many schools cast doubt on whether a growing number of people will be able to pay those loans back.

In a July report (pdf), Moody’s opined that students’ inability to pay back their loans could cause the next economic crisis in the U.S. According to the Education Department, default rates are on the rise nationwide, standing at 7 percent as of September 2010 (the latest figure available), up from 6.7 percent the year before.

Moody’s expressed special concern about students at for-profit proprietary schools, which include many trade and online universities, and where graduation rates are typically lower than those of traditional colleges and the loan-default rate is higher. Minorities make up a majority — about 54 percent — of students enrolled at these schools, said Education Department spokeswoman Sara Gast.