The Student Loan Bubble is Starting To Burst

- All these young people who can't afford homes, cars or kids will cause the economy to not grow as fast as it otherwise would.

- And if the economy is slow, fewer jobs will be created, keeping these young people poor even longer.

Of course, not everyone has parents that they can move in with, and those who don't have that safety net will suffer the most.

The fiction of student loans is tricky because under Bush they changed bankruptcy rules to exclude student debt. But fundamentally when banks are forced to write down bad student debt, their rosy asset picture becomes non-rosy. When that happens they are required by regulators to not lend. And this is ugly for the whole economy.

In 2008 we resolved the problem by having the US government find ways to lend tremendous amounts of money on very favorable terms, and then the Fed picked this up with a similar policy that they call quantitative easing. This creates lots of money in financial markets so that things like banks can continue to operate. The bigger long-term problem is how we'll ever exit the policy.

To give an idea how sensitive this situation is, a while ago Bernanke announced that if things continued to improve faster than expected, in a year the Fed would evaluate whether to exit QE 2 faster than originally planned. You can't come up with a milder statement that the policy might end. The markets went crazy. A few days later, Bernanke came out and said we won't be doing that after all, then markets calmed down.

There is no question, a student loan debt crisis will be responded to with more QE. The problem of exiting the mess will become bigger. Historically countries have exited this type of policy only after the crisis of a currency collapse. But so far the market players seem to be betting that they will get out of the USA before the other guy when the crisis hits, and in the meantime the USA looks safer than China and Europe.

However the financial economy is always a mess. And they are always finding another way to kick the can down the road. That will certainly happen again. And again. And again. Until it doesn't. Every time the doomsayers say, "We don't see how we can kick the can down the road again!" But we do. The dot com bust was resolved with easy interest policies that resulted in a housing boom that resulted in the financial crisis. That was resolved with QE.

Take your best guess as to whether we'll kick this can down the road as well...

In-state public school has a lower sticker price, but have less non-loan need-based aid so students have to come up with a high percentage of the sticker price. The top private non-profit schools have higher sticker price, but provide a lot more non-loan need-based aid, so students have to pay a much lower percentage of the cost. At Princeton, for example, the average debt at graduation is only $5k.