Skip to comments.EASY CREDIT IS INFLATING A MASSIVE STUDENT-LOAN BUBBLE
Posted on 06/22/2013 1:40:12 PM PDT by SeekAndFind
Americans are still talking about the recently deflated housing bubble, but theres a new bubble in town. Its the student loan bubble and when this one pops, it might dwarf the wreckage weve witnessed in the real-estate markets.
In the latest news, the Federal Reserves Board of Governors warned that soaring student-loan debt has parallels to the housing crisis, according to a May report in Bloomberg. As with housing, free-flowing cash will lead to widespread default. Of course, its easier to repossess a tract house than to take back a potentially worthless degree.
Federal Reserve Chairman Ben Bernanke dismissed these concerns by saying that most of the money in the student-loan sector is federal money, which just means taxpayers rather than lending institutions will take the initial hit. But the board of governors makes a salient point as student loan debt soars to $1 trillion and exceeds the nations level of credit-card debt.
The bankers said student lending shares features of the housing crisis including significant growth of subsidized lending in pursuit of a social good, in this case higher education instead of expanded home ownership, according to that Bloomberg report. The lending has put upward pressure on tuition, just as the mortgage lending boom led to rising home prices, they said, calling both examples of a lack of underwriting discipline.
For my entire life, Ive heard policy makers insist that there is insufficient funding for education and that getting a college degree is the pathway to a better life. But as the bankers noted, the sea of student-loan money artificially boosts the cost of tuition, which creates a new cycle of indebtedness by students. Higher tuition makes pay-as-you-go a less-likely option.
Lax student loans make it easier for colleges to spend money poorly. If the federal government provides a loan to virtually anyone who applies for one, then university administrations can spend foolishly. Theres so much money, why not hike salaries and pensions for professors? Why not offer programs and majors that are of questionable intellectual or economic merit?
I know people with six-figure loan debt, multiple degrees and few job prospects. There were few lending standards hey, its only government money so they racked up loan after loan. Others use loans to gain useful degrees with lucrative job potential, but these graduates come out of school with a crushing load of debt that will take decades to repay.
In 2012, Congress debated a controversy surrounding for-profit colleges, which receive about a quarter of the total federal Title IV student aid programs. The impetus was the latest iteration of the GI bill for active military and veterans, who often choose for-profit education programs.
These colleges use high-pressure sales tactics to ensnare veterans, promising them a high-quality education and a guaranteed job, and urging them to sign up on the spot, according to Jerome Kohlberg, in an opinion piece in the Pittsburgh Post-Gazette. They lock themselves into long-term commitments, turn over their GI education benefits and sign up for student loans to cover the difference.
The alleged abuses at some for-profit colleges have reminded some critics of abuses by the subprime mortgage industry. But these problems are almost solely the result of easy access to government dollars. Indeed, public universities do the same thing lure students into long-term debt commitments based on a free flow of federal dollars, even if they dont use the high-pressure tactics used by some recruiters in the private educational business. For-profit and non-profit universities rely heavily on government tuition subsidies.
Many government employees, by the way, receive automatic pay boosts when they receive additional education, so this government-funded system ratchets up government spending throughout the entire taxpayer-funded system.
When I attended college, only the rarest student stayed on campus beyond four years. Many received degrees in less than four years. Now, its typical for students to take six years to get through a California State University program. The education establishment claims the problem is the result of too little money, but its the opposite. There is so much money available to anyone with a pulse that there are too many students on campus and not enough classes for them.
Look at the large portion of students taking remedial courses, which reminds us that more college doesnt always equal a better education.
Given that students who get themselves in financial trouble cant unload their debt through bankruptcy, easy college tuition money can mean a lifetime of personal debt problems. These problems are the result of government officials pushing a social good i.e., broader college attendance, or, in the real estate market, broader home ownership.
The housing bubble was inflated by government-dictated lending policies designed to expand home ownership by requiring banks to make loans to people who couldnt meet traditional down-payment and credit standards. And government policies designed to expand educational opportunities have inflated the cost of tuition, cheapened the value of education and burdened new generations with crushing debt loads.
Yet those of us who call for less government meddling and more private-sector discipline are the ones considered heartless.
Blank checks issued all in the name of education. 60%+ of them shouldn’t be going to college. They would be better off going to trade school or straight to work.
A college ‘education’ is mostly a waste of time, not to mention money. This bubble was created to prop up the Leftist cesspool known as academia.
Not to worry; with the Trillion that we will get from Amnesty, we can use the Taxpayer money to buy the Yewt vote by “forgiving their Tuition Loans” (so the Bankers are not going to lose a dime, as always)
The problem, of course, is that student loans are nondischargeable, so there is no way to default and walk away from them, unlike a mortgage. So the bubble is more like a permanent albatross, never to burst. Not that you’d want to be near a bursting albatross...
Nothing ever changes.
The student loan bubble was built on the presumption that more socio-political instruction from universities would improve the economy...or something. ;-)
If tiny little Hillsdale College in Michigan can line up their own group of lenders to finance their student's education, then there is no reason why a Harvard, Yale or Penn State can't do the same.
The problem is, how can you tell that the bubble has burst?
Remember that Obama effectively nationalized the student loan program, so the government is effectively the creditor to this foolishness.
All told, there are an estimated 37 million Americans with outstanding debt from student loans, with about 12 million added each year. About $1 trillion is outstanding debt.
So the big question becomes, how much old debt is being retired compared with new debt being added each year?
If there is a major economic downturn, much less of this debt will be retired. Then the question becomes will the US government continue to provide new loans?
From a different perspective, states also heavily subsidize universities, and they could seriously reduce the student loan bubble by refusing to pay for “worthless” majors and classes. Worthless in that they do not result in gainful employment in that field.
All told, if any party to this stops playing the game, the bubble collapses. But this collapse will be quite different from other collapses. Think of it more as a contraction.
The whole student loan scheme is predicated upon kids graduating from college and getting good paying jobs to repay the loans. 0bama has seen to it that THERE ARE NO GOOD PAYING JOBS, so the whole scheme collapses, EXCEPT for the kids of congress, who are "forgiven" and don't have to pay back the loans.
Nah, there are all kinds of ways to walk away from your student loans. Take just about any job in the booming public sector, for example:
Now, that's an interesting statement. Somehow, I suspect that your shadow has never darkened the doorway to a college classroom. IOW, you don't know what you're talking about.
How easily the ignorant are fooled. BA ‘cum laude’, MA Columbia Univeristy. Feeling better? You make my point.
Hold it there! Aren’t you the one who says that she was fooled? After all, you spent all those years in college and now states that a college education is a waste of time and money. Isn’t that an admission of your poor judgment?
I don’t think it’s a waste of time and money but you do.