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Student Loan Bubble: The Hidden Reality

Posted by Larry Doyle on September 5, 2012 10:00 AM |

America is increasingly aware that the student loan bubble is a major problem for millions of students, families, and our nation as a whole. While far too many politicians from both sides of the aisle talk in platitudes about the need for education, few if any of these politicians are willing to pull back the cover and expose the ugly reality embedded in current data on the student loan bubble.

Yes, America knows that total student debt now exceeds all other forms of consumer debt. We also know that total student debt is now approaching $1 trillion dollars. I personally believe that the cost of education at public and private colleges and universities has to adjust downward but that reality does not appear imminent.

What don’t we know about student debt and how will it hurt us? Let’s navigate. 

A recently released report by Demos highlights that the Student Loan Crisis Continues to Escalate,

The student loan crisis escalated further in the second quarter of 2012, as the amount of outstanding debt reached the highest level ever recorded. A new report from the New York Fed suggests that even while the rest of household debt improved since March, driven by decreasing credit card and housing debt, student loans have worsened.

Their report finds that, while overall household indebtedness declined $53 billion from the first quarter of 2012, student loan debt rose $10 billion to reach its $914 billion peak.

The picture is even bleaker than it appears.

Although the delinquency rates for student loans rose to 8.9%, that number is understated. It doesn’t account for people who are currently in a deferral period from their loans or for students currently enrolled in college, who’ve taken on more student loan debt than any preceding generation.

Should you exclude students currently in college, and who are therefore exempt from becoming delinquent, the delinquency rate rises from 8.9 to 21%. That’s a startling high number, double the amount of credit card delinquencies (10.9%).

A delinquency rate of 21% spells a near certain crash and doomsday scenario for both borrowers and lenders alike but will also serve as a serious drag on our economy as a whole.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Ron Larson

    Do your readers know that student loans are guaranteed by the government. They are a no-risk loan for banks to make. They only have upside.

    That is why “schools” like Univ. of Phoenix and others have gotten so large. They dup their students into taking on large amounts of debt for worthless degrees. There are tons of fly-by-night schools that aren’t even accredited selling degrees for loan revenue.

    The solution, which should have been implemented years ago, is to limit the loan proceeds only to accredited universities. And they also could have coupled that with a price guarantee, similar to health insurance, that they price of the degree is not out of control.

    However, these “schools” have Congress in their pocket. They take those loans and funnel the funds right back to Congressman’s bank account. Pure corruption.

    • fred

      Should the gov’t be in the business of loan guarantees? Haven’t we learned our lesson?

      I understand the socalled “reason” for the guarantees, but I believe this is, undeniably, what fuels the upward spiral in prices.

      Without the free market to provide some sort of cost control mechanism via “proper” risk management, gov’t guarantees will lead to 1) an unaffordable bubble and/or 2) a misallocation of resources.

      Unlike housing which responds reasonably quickly to higher cap rates, the student loan(SL) “bubble top” will be (or already is) less pronounced and is/will probably accompanied by a steady spike in SL defaults, as employment salaries are unable to support debt service in a global economy.

      Just as the housing top was “marked” by a spike in subprime mortgages, the SL crisis will be marked by a spike in bad loans as measured by a decline in graduation rates, (accredited or otherwise).

      I smell another, or more accurately described “ongoing”, bank bailout! Just how long will the markets look the other way!

      Is it the banks that have captured Washington or is it the “social” liberals in Washington who have tunneled into the banking vault?

      What’s that I hear? Every day growing louder and louder, the “tick-tock, tick-tock” of the US Federal Debt clock.

      The American business model developed and refined over the past quarter century is broken and in need of structural reform.

  • Mike

    Not sure I agree with the Demos math. The most recent (admittedly dated) default data is FY 2009 data and the 8.8% default rates include only those loans that have entered repayment. it does not include students in deferment periods. Therefore, you cannot then exclude enrolled students again to get a 20% default rate. The data already excludes them!

    http://www.ed.gov/news/press-releases/default-rates-rise-federal-student-loans

    quote:
    “..The rates announced today represent a snapshot in time, with the FY 2009 cohort consisting of borrowers whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010. More than 3.6 million borrowers from 5,900 schools entered repayment during this window of time, and more than 320,000 defaulted….”

    • LD

      Mike,

      Demos is highlighting the “delinquency” data, that is, borrowers who are behind in their payments, not the default rate. A 20+% rate of delinquency portends a likely high rate of default, which will likely be absorbed by U and ME (Thank you Ron for your pointed comments)

  • Russ

    Larry,

    The escalating cost of higher education is directly correlated to the artificially controlled student loans by the government. A complete idiot would see this coming. This will be the next thing that brings the economy down. I don’t know why Paul Ryan isn’t screaming from the mountain tops about this. Government interference with supply and demand is the singular driver of tuition rates.

  • Eddie

    So why the bubble? Isn’t it easy access to liquidity . . .
    All over again?

  • Chris

    1 trillion just doesn’t seem that large a number for young people to owe. The national debt is approaching 16 trillion, I think it is more a lot more, but for the sake of argument we will used the published figure. So the young people whom will be mostly responsible for it used some of it to get educated. Also believing that jobs would be available when they graduated. Wasn’t the idea being that having an educated work force would more than pay for the student aid programs through increased income taxes? The United States was able to become the economic power it was due to the education aid made available from the GI bill after WWII. Because of the GI bill, my dad was able to attend Fordham University and St. Johns law as were the multitude of veterans. I wonder what our nation would have been like in the 50′s and 60′s if that bill had not existed.

    • LD

      Chris,

      Thanks for writing. I agree with your assessment that education is a critically important and necessary path to prosperity but ponder why 21% of those holding these loans are delinquent. What does that tell us?

      Also, education costs have DRAMATICALLY outpaced inflation over the last decades. I grant you that the GI bill was tremendously effective but the way that education costs have exploded indicates to me that the system has become more than a little bit of a racket.

  • Jim

    What makes this worse is the following:

    1. Many of the largest loans are to students with “worthless” majors such as art, music, anthropology, psychology or sociology. Even if they can find a job in their field it will probably pay very little and loan repayment will be difficult if not impossible.

    2. The Democrats are proposing limits on how much of a graduate’s income can be required for loan payment. So, a music major who makes $25 K waiting on tables only has to pay 10% of that for loan repayment. In some cases the payments will not even cover interest, so the unpaid balance keeps growing.

    3. Not to worry. After 20 years we’ll forgive whatever unpaid balance remains. That will buy votes for sure — from deadbeats.

    4. And if you do “public service” — i.e. become a neighborhood organizer — we’ll forgive payments during that time.

    So, run up as much debt as possible, major in political science and take a job you can claim as a public service. And, if you end up as a waiter make sure its in the Senate dining room.

    Sounds like another recipe for disaster to me.

  • Laura

    How many people know that student loans are currently the US governments biggest asset? Read this:

    The U.S. Government’s Single Largest Asset is Student Loans

    And then say… Economic collapse anyone?

  • Chris

    A degree in Art History or whatever, isn’t necessarily that important. The importance is they have an education. When I went to college I graduated with a BA in English, and ended up on Wall Street. The trouble is there are no jobs for graduates, regardless of what they earn their degree in. In addition, its not the loan program that is at fault, but the institutions that manipulate the program for their own profit. And that is not limited to the Student loan program, but all the programs the federal government puts in place.

  • Steve

    There are two problems with the student loan problem.
    One is that we are told all through school that if you don’t go to college you’ll get no where.
    What they should be teaching kids in school is that college isn’t for everyone.
    And it’s great to learn a trade.
    The other issue is for profit school.
    They prey on the weak mind, who has bought into the college idea, but can’t get into a good school.

    They receive a useless degree that ends up getting them a McJob.

    I’d bet that most of the student loan debt is from those who have attended for profit schools.

    • fred

      Steve,

      I was with you until you accused for-profits as being THE problem, certainly they are part of the problem and quite possibly a “tell” for the top of the SL crisis.

      In my experience, OFTEN the only difference between for-profit and not for-profit or non-profits is the 0 at the bottom and the competative advantage extended to non-profits at taxpayer expense.

  • fred

    LD,

    Just a thought.

    Since the primary purpose of non-profit colleges and universities is to provide “affordability” and given the fact that student loans are essentially available to almost anyone in need, is it time to reconsider the “no-tax” pass to our hallowed educational halls?

    A rescission of most favored tax status would at least provide some transparency by exposing the true cost to society of a “subsidized” college education for all to scrutinize.

  • fred

    I hear you LD, but realistically for most of us, all this “Letter from the President” really means is that Barrack gets a preference and no student loan debt to pay off while my kid gets a rejection letter and a mountain of SL debt.

  • Matt

    Forget college / frat parties and instead take a course on software development – one of the highest paying occupations. Unless you intend on joining a licensed occupation, you really don’t need a university degree. We all know that useful knowledge is generally always gained on the job.






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