What Happens to Student Loans During a Recession?
Probably the first thing that anybody with a student loan outstanding wants to know is, “Will my loan be in jeopardy because of the recession?”
The short answer is “No”. The current downturn in the economy is unlikely to cause any real issues for students, because of the preventive measures already in place. After all, one of the quickest forms of suicide a government could do is cut funding for education during a recession, since students are tomorrow’s workforce which companies will need to employ if they hope to do better in the future.
Now, the construction industry and mortgage companies will suffer, due to a poor housing market. That goes hand in hand with any economic downturn, and is one reason why the real-estate-related industries are not seen as recession-proof. During the Great Depression of the 1920’s and 1930’s in the US, construction literally ground to a halt, leaving abandoned cranes and half-finished skyscrapers to stand and rust. It’s a lesson which bears remembering.
In addition, the funding for student loans comes from the federal government, not the states. The federal government doesn’t cut back on funding like the states do.
What other problems will a recession cause for a student?
A recession can affect student loan rates, possibly raising them, and students could certainly find fewer job prospects, which makes it more difficult to find that permanent job after graduation which you need to pay off the loan to begin with. However, again, a recession that is triggered by a slow-down in the housing and banking industries isn’t of too much concern to anyone currently in school.
The people who feel a banking-and-housing recession are the seniors, retired, and elderly. They have houses which they most likely bought during a prosperous decade at an inflated price which are now barely worth the dirt they’re sitting on!
If anything, a student may even benefit from a recession. Plunging real estate values mean anybody who owns property is happy to make any money off of it, so rent prices will drop. Banks are also happier to loan money in a recession, since they need that interest-rate income. Finally, when many in the workforce lose their job, this drives consumer prices down. Meanwhile, your money supply is safe and sound, and is now a more powerful spending dollar.
What job markets are vulnerable during a recession?
Now, there’s a good question. Of course, you should aim for the industry or career that is best suited to your interests, skills, and abilities. But with that out of the way, there are always markets which seem to do feel the recession hit the hardest. If you are a student in a recession, one consideration you might make is to switch your major away from an industry which won’t be hiring when you enter the job market. Such as:
* Large luxury goods. - Cars, boats, jacuzzis… you get the idea. Anything whose durability is measured in decades doesn’t do well during a recession, since it’s too easy to keep the old model around rather than replace it, and first-time purchasers will be deterred into waiting for a while. A recession is a really, really bad time to be a car salesman.
* The computing industry. - Now, if you’re talking about manufacturing the physical machines, that’s different. Computers these days are no more a luxury item than a phone, so they will only feel a slight dip in the market. However - and this needs to be emphasized - software development, web design, and general jobs in the IT sector will starve during a recession. The tech market is unstable and doesn’t pay very well to begin with. A recession is the perfect time for an IT company to push projects out the door and then ride for a couple years selling their old products without updates, while they lay off their developers. A recession is also a great time to outsource an IT job overseas to the cheapest country.
* Fashion. - One of the first places consumers tend to look for a bargain is in their clothing budget. So, while common sense tells you that people will always need clothes, the kinds of clothes people will be buying during a recession will be thrift-store bargains and knock-off brands. You can count on the fancy-label clothing, along with the perfume/cologne market and the jewelry market, to do poorly.
* Real estate and construction - This has been touched on before. Not just for private homes, however. Commercial and industrial construction suffers as well. Don’t forget all the industries associated with it - electricians, plumbers, architects, landscapers, carpenters, etc. They all see a pinch during a recession, through the combined effects of nobody wanting to incur the expense of starting a building project unless they have to, and the property-owners and leasers who either lose their real estate through a foreclosure or go out of business and give up their lease. You know those boarded-up buildings and empty store-fronts you see during a recession? That should tell you what real estate’s worth.
* Entertainment - A recession doesn’t affect the entertainment industry as much as you might think, but it does hit it some. Particularly at the beginning. The film, music, and gaming industries all see a drop in sales as customers decide to put off entertainment purchases. However, entertainment-related goods are usually priced so cheap that their purchase isn’t too inhibitory even to cash-strapped customers, so the sales trickle back after a while. Today’s students have much more financial freedom and options available to them than previous generations. A government student loan consolidation may be the solution. Can’t hurt to check it out at least.
Here’s a YouTube video about recession:
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