A couple days ago, we have discussed and shared the idea of college drop-out insurance (CI), as our response and contribution to reduce the negative impacts that may cause to the economy as a result of a never-declining growth of US student loans.  When more people taking the loans, then the probability that some of them will be defaulted will also increase.  Recent study shows that the rate of student loan defaults have shown a trend that makes some of the economics actors to equate it as the “Housing Bubble”.  Scary?, may be so.  AAEA has predicted this is going to happen not last year, or two years ago, but longer than that.  Based on the actual data, the Association has makes a prediction, that if the source of tuition increase does not get controlled then consequently something could happen.  To read the article, please click here.

So, what is the viable solutions, among many possible ways that policy makers or market players can do?  Some in Wall Street will bet either way, right?  The student loans bubble (SLB),  may have devastating impacts in the market considering that the Bull has run about ten years, because of the money supply and low interest rate policy.  SLB may or may not happen, depending on:

1. If majority of the loans are issued by the government, instead of the private lenders.
2. How strong the labor market is?  If it keeps absorbing the new batch of graduates, then pay-back streams may not get disrupted.
3. What is the composition of those graduates in hard and soft science?
4. If inflation rate picks up, it may affect borrowers’ ability to make repayment.

However, if SLB happens, it may trigger chain reactions in the market, and the accumulation of the multiplier effects due to market corrections will be significant enough to repeat the housing bubble?

Uncle Sam can easily add a provision on the loan agreement where the Institutions or/and the borrowers have to buy an insurance to cover the possible events when the students drop-out school.  Of course this will increase the burden to the students.  Perhaps, a better idea is to shift part of the burden to Title IV institutions, colleges or universities where the students are enrolling to cover unfortunate events which may cause the student to drop-out school.  This will motivate them, the institutions, to manage such a chronic problem facing Uncle Sam.  It has a good chance that the school drop-out rate can be reduced, either by real efforts, or by lowering or watering down the courses passing requirements.