Student loans are over $900 billion. Parents of college students cheer them on. “Go ahead. Load up. It’s for your own good. It will pay off. You’ll see.”
The average college graduate leaves college $40,000 in debt. Parents beam. “We’re so proud.”
The Department of Education has reported that 13.4% of the 2009 graduates are in default. The government had been fudging the figures for years. It has now fessed up.
As more students sign on, more of them will be trapped.
This has been compared to the subprime loans in real estate. In this respect, yes: lots of loans will not be repaid. But there is a major difference. No one can “foreclose” on a human being. There is no asset out there that serves as collateral. Who owes this? Students who cannot pay and who have no assets.
These young adults cannot get out of the trap. The bankruptcy law does not apply to student loans. But they cannot pay, either.
The banks now have bad debts on their books. The federal government guaranteed these loans in many cases through “Sallie Mae.” The government is on the hook.
Here is a chart of the growth of these loans since 2003.
We can see the extent of the increase: from about $230 billion to over $900 billion. This took nine years.
Will it stop? Not unless Congress stops it. Does this mean the bubble will not pop anytime soon? That’s what it means.
The government underwrites these loans. This is a politically created bubble. It will take politics to stop it. The banks won’t stop lending. Congress guarantees the loans, and they are very profitable. There is no way the banks can lose. The students cannot declare bankruptcy, and the government pays off if the students don’t. What a deal! For the banks. Not for taxpayers.
Will Congress borrow to pay off the banks? Of course. Rates are low. Why not load up at these low, low prices? Congress can’t say no to any voting bloc.
Who wins? Banks. Who loses? Students whose parents did not warn them.