There’s a one-trillion-dollar student debt time bomb ticking in the U.S. economy. And it’s only matter of time before it implodes and takes the sovereignty and credit rating of our nation with it.

The majority of student debt in the U.S. economy is backed by the federal government. If students default on their loans, the government takes the loss.

According to New York Federal Reserve report, student debt has tripled over the past eight years in the U.S. economy. It stands at $966 billion. (Source: Huffington Post, February 28, 2013.)

As student debt increased, a troubling trend emerged. The student loan default rate has surged from 10% in 2004 to 17% in 2012—a 70% increase over eight years in student debt default rates.

What’s even more dangerous is that tuition costs are on the rise. According to a report by the State Higher Education Executive Officers Association, average tuition after grants and scholarship rose to $5,189 for the academic 2011 to 2012 period from $4,793 in the prior period, adjusted for inflation—an increase of 8.26%. (Source: Wall Street Journal, March 6, 2013.) As the default rate rises, and tuition continues to increase in the U.S. economy, the government will be liable for more student debt than ever before.

If this actually occurs, I won’t be surprised to see credit rating of the U.S. economy get slashed.

It may appear that the U.S. government can pay for its expenses by just issuing more T-bills and having the Fed buy them, but it will eventually get caught up. The creditors of U.S. economy will realize what’s really cooking in the books.

As I have said in past, there have to be fundamental changes in the U.S. economy, rather than quick fixes. Student debt can have a major impact on the U.S. economy if not handled properly. Some might say this is nowhere close to the mortgage crisis we had in 2008, but I’d like to ask them a question: Now that U.S. economy is exhausted, how will the looming student debt crisis be handled? It will be handled in the only way left—even more paper money printing.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi, Profit Confidential, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.