Politics

Is the student loan bubble about to pop?

Is the student loan bubble about to pop?

Reuters brings grim tidings from the world of America’s debt-encrusted college students:

Banks wrote off $3 billion of student loan debt in the first two months of 2013, up more than 36 percent from the year-ago period, as many graduates remain jobless, underemployed or cash-strapped in a slow U.S. economic recovery, an Equifax study showed.

The credit reporting agency also said Monday that student lending has grown from last year because more people are going back to school and the cost of higher education has risen.

“Continued weakness in labor markets is limiting work options once people graduate or quit their programs, leading to a steady rise in delinquencies and loan write-offs,” Equifax Chief Economist Amy Crews Cutts said in a statement.

The total student loan debt burden is over $1 trillion now, and the cost of tuition has been rising steadily.  Reuters portrays these rising costs as a reason students are taking out bigger loans, although others would say the availability of easy loan money has inspired those soaring tuition rates:

The cost of earning a 4-year undergraduate degree has gone up by 5.2 percent per year in the last decade, according to the CFPB, forcing more students to take out loans. While other forms of debt went down, student loan debt continued to rise through the economic crisis.

Delinquencies have spiked in the last eight years, with about 17 percent of the nearly 40 million student loan borrowers at least 90 days past due on their repayments, a February report from the New York Federal Reserve Bank showed.

Not only is this tottering mountain of debt another bank crisis in the making, but student loan defaults ruin a young person’s credit for other purposes, making them less economically useful as consumers.  Proposed solutions to the problem range from debt restructuring to simplifying the process of applying for a repayment plan students can live with.

Some charts published at NakedCapitalism in early March include a bleak assessment of student loan delinquency eclipsing credit card delinquency, which is “particularly ugly given that student loans cannot be discharged in bankruptcy. It’s more rational to get in arrears on anything else, since you have some hope of negotiating for a restructuring.”

loan_delinquency

Some of the major reasons to think of this as an alarming financial “bubble” are the unconvincing arguments emanating from those who don’t think it’s a bubble.  For example, the Atlantic says there’s nothing to worry about because, unlike the subprime mortgage A-bomb, there’s not much student loan debt being traded on the open market:

If the mortgage market was a Costco-sized superstore of exotic investment vehicles, the trade in education debt is more like your local bodega. At the height of the housing bubble, the banks, Fannie Mae, and Freddie Mac combined to issue trillions of dollars worth of mortgage backed securities a year, then placed huge sides bets on them using credit default swaps. By comparison, Sallie Mae (again, the biggest name in private student lending) sold just $13.8 billion worth of student-loan-backed securities in 2012, according to its annual report.

What’s more, most of those bonds were extremely safe. That’s because they were made up of debt issued under old Family Federal Education Loan Program, in which the government guaranteed student loans made by banks. Tax payers could sadly end up on the hook for those assets if students start defaulting en masse (frustrating, I know), but they won’t ever blow up Wall Street, especially because unlike mortgages, banks don’t use student-debt-backed assets as collateral to secure their day to day.

Nothing to worry about – when the bubble pops, it’ll just be us poor old taxpaying chumps with a trillion dollars of shrapnel buried in our faces.  What’s another trillion dollars in public debt?  That’s only a dozen times the size of the sequester cuts that brought Barack Obama’s government crashing down in flames.  Would the currently fashionable liberal response be that debt is irrelevant, as long as the government gets to keep spending its accustomed boatloads of money?  Or have they resumed pretending to care about the national debt to use it as leverage for tax increases yet?

And if debt is just abstract numbers on a spreadsheet Uncle Sam can rejigger without limit, how long will it be before vote-seeking politicians begin floating debt forgiveness as a way to gobble up the youth vote?  The student loan bubble has inflated tuition rates, devalued college education (which is now taken for granted as serving the role high school diplomas filled a generation or two ago – a certification of minimal educational competence) and turned a large number of young adults into debt serfs.  People are going broke trying to pay for diplomas they can’t really use, thanks to the moribund job market.  Perhaps the best thing that can be said about the situation is that it’s not as bad as the subprime mortgage crisis.

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