Student Loan Bubble
A key reason why a preponderance of the population is fascinated with the student loan market is that as USA Today reported in a landmark piece last year, it is now bigger than ever the credit card market. And as the monthly consumer debt update from the Fed reminds us, the primary source of funding is none other than the US government. To many, this market has become the biggest credit bubble in America. Why do we make a big deal out of this? Because as Bloomberg reported last night, we now have prima facie evidence that the student loan market is not only an epic bubble, but it is also the next subprime! To wit: "Vince Sampson, president, Education Finance Council, said during a panel at the IMN ABS East Conference in Miami Monday that lenders are no longer pushing loans to people who can’t afford them." Re-read the last sentence as many times as necessary for it to sink in. Yes: just like before lenders were "pushing loans to people who can't afford them" which became the reason for the subprime bubble which has since spread to prime, but was missing the actual confirmation from authorities of just this action, this time around we have actual confirmation that student loans are being actually peddled to people who can not afford them. And with the government a primary source of lending, we will be lucky if tears is all this ends in.
When you mess with pricing signals and resource allocation, you get bubbles. And one could easily argue that OWS is as much about the student loan bubble bursting as about Wall Street.
I must say that I never had a ton of sympathy for home buyers who were supposedly "lured" into taking on loans they could not afford. The ultimate cost for most of them was the loss of a home that, if the credit had not been extended, they would never have had anyway. US law protects our other assets from home purchase failures, and while we have to sit in the credit penalty box for a while after mortgage default or bankruptcy, most people are able to recover in a few years.
Student loans are entirely different. In large part because the government is the largest lender via Sallie Mae, student loans cannot be discharged via bankruptcy. You can be 80 years old and still have your social security checks garnished to pay back your student loans. You can more easily discharge credit card debt run up buying lap dances in topless bars than you can student loans. There is absolutely no way to escape a mistake, which is all the more draconian given that most folks who are borrowing are in their early twenties or even their teens.
I can see it now, the pious folks in power trying to foist this bubble off on some nameless loan originators. Well, this is a problem we all caused. The government, as a long-standing policy, has pushed college and student lending. Private lenders have marketed these loans aggressively. Colleges have jacked costs up into the stratosphere, in large part because student loans disconnected consumers from the immediate true costs. And nearly everyone in any leadership position have pushed kids to go to college, irregardless of whether their course of study made even a lick of sense vis a vis their ability to earn back the costs later in the job market.
Public service note: Their are, to my knowledge, five colleges that will provide up to 100% financial aid in the form of grants, such that a student can graduate debt free: Princeton, Harvard, Yale, Stanford, Amherst. These are obviously really hard schools to get into. I don't think a single one has a double digit percentage admissions rate. But these are the top schools that hopefully establish trends.
I am thrilled my alma mater is on the list. For years I have argued that they were approach severe diminishing returns from spending tens of millions of dollars to improve educational quality another 0.25%. If an institution is really going to live by the liberal arts college philosophy -- that a liberal arts education makes one a better human being irregardless of whether the course of study is easily monetized after graduation -- then it better have a way for students who want to join the Peace Corp or run for the state legislature to graduate without a debt load than only a Wall Street job can pay off.
By the way, my other proposal for Princeton has been this: rather than increasing the educational quality 1% more to the existing students, why not bring Ivy League education to 3x as many students. I have always wondered why a school like Princeton doesn't buy a bunch of cheap land in Arizona and build a western campus for another 10,000 kids.
My son and I spent the last year touring colleges. One common denominator of all the good and great private colleges: they are all over 100 years old. Rice was probably the newest, when a rich guy toured the great colleges of the world and thought he could do as well, and started Rice (Stanford is older but has a sort of similar origin story). Where are the new schools? The number of kids with the qualifications and desire to go to a top private college have skyrocketed, and tuition have risen far more than inflation, but there is no new supply coming on the market. Why is that?
