Politics

JP Morgan Chase pulls out of the student loan market

JP Morgan Chase pulls out of the student loan market

This is not a good sign, as one may glean from the title of the CNBC post from John Carney, “The Student Loan Bubble Is Starting To Burst.”

The largest bank in the United States will stop making student loans in a few weeks.

JPMorgan Chase has sent a memorandum to colleges notifying them that the bank will stop making new student loans in October, according to Reuters.

The official reason is quite bland.

“We just don’t see this as a market that we can significantly grow,” Thasunda Duckett tells Reuters. Duckett is the chief executive for auto and student loans at Chase, which means she’s basically delivering the news that a large part of her business is getting closed down.

That sounds disturbingly familiar to Carney:

The move is eerily reminiscent of the subprime shutdown that happened in 2007. Each time a bank shuttered its subprime unit, the news was presented in much the same way that JPMorgan is spinning the end of its student lending.

Uh-oh.  How big is the student loan bubble, anyway?

There is over $1 trillion in outstanding student loans, making it the second largest source of household debt after mortgages. Just 10 years ago, student loans stood at $240 billion. About $150 billion of the total is comprised of private student loans made by banks and other financial institutions, according to a report issued by the Consumer Finance Protection Bureau last year.

The CFPB reported that around $8 billion of private student loans were in default. That number is likely to go higher if interest rates rise because most private student loans, unlike federal loans, are variable rate loans linked to Libor or the prime rate.

US Bancorp is already out of the student loan business, and now JPMorgan Chase is walking away from it.  But no need to worry, writes Jordan Weissmann at the Atlantic in a response to Carney’s article, because “in 2010, Congress and the Obama Administration pulled the brake on the gravy train” and nationalized most of those student loans:

As a result, lenders like Sallie Mae, Wells Fargo, and JPMorgan have been left to scrap with each other over the far tinier market for private student debt. The Consumer Financial Protection Bureau estimates that financial institutions issued less than $6 billion worth of college loans in 2011. The federal government, in contrast, lends more than $100 billion a year to students.  In other words, private student lending has been reduced to a niche.

Oh, well, no problem then.  We all know taxpayers have infinite money, and can afford any level of insolvency.  $100 billion a year barely qualifies as the lint lining Uncle Sam’s deep pockets.  It might be a bit rough on the hopelessly indebted students, who piled up six figures in debt to get the kind of education high school used to provide, but have to compete in a market where most of the dwindling full-time jobs require a college degree:

For the most part, it’s not helpful to think of student lending, circa 2013, in terms of bubbles at all. Rather, as Chadwick Matlin has put it at Reuters, it’s more of an anvil weighing on a large but discrete group of very unfortunate borrowers. In all but the most rare circumstances, it’s impossible for former students to discharge their bad debts in bankruptcy. That means the government is mostly protected from defaults. So are the banks, to a degree.

Young adults, however, are on the hook for debts they can’t handle, but which they’ll likely continue to take on so long as college costs stay high. There won’t be a moment where the market goes “pop.” But there’s still a crisis that needs to be addressed.

So no need to worry about a bubble popping… unless, of course, some ambitious politician starts telling young people he’ll buy their votes by forgiving chunks of their student loan debt.  Which will skyrocket if interest rates go up.  That could never happen, right?

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