Debt Downgrade and the Student Loan Bubble
August 7, 2011
Debtpocalypse continues!
The cost of money has just gone up. It makes sense, really, that this happened, but the disappointing part is that it was totally avoidable.
And S&P directly blames the GOP. Interesting.
the finger = bankruptcy power for student loans
The student generation is going to be paying more interest on its student loans than ever before. Many of us have worsening credit, or our financial situation is sliding. 85% of us are either just getting by or are falling behind. Now our country is slipping as a whole.
Is this a bad time to mention that we lost the medal count at the Beijing 2008 Olympics for the first time, like, ever?
In the words of the great Dr. Dre himself, “Never let me slip, cause if I slip, then I’m slippin.” America? Ya slippin?
The Student Loan Bubble
How similar are 2011 educational lending practices and 2006 home lending practices?
Housing loans = education loans
based on the American ideal of owning a home for all = based on the American ideal of higher education for all
Politicians encourage private lenders to give out home loans = Politicians encourage private lenders to give out student loans
Private lenders give you a 6-figure mortgage… but only if you have a heartbeat and a job! = private lenders give you a 6-figure student loan… but only if you have a heartbeat and an acceptance letter!
home prices collapse thanks to Wall Street greed = employment collapses thanks to corporate greed
In Plain English
The “student loan bubble” is really just a metaphor for a mass default on student loans. In plain English, this means that students will borrow money, and then later not be able to pay it back, at the new, steeper rates, that are going to be charged as a result of recent congressional inefficiency.
The debt downgrade makes life harder for students with debt.
Student debt needs to be forgivable by bankruptcy! It’s not! Let’s change the law!
Somehow less funny than the typical piano
Just to be clear, I’m saying this now, and I’ve been saying this for a few months now. The student loan structure in our country is going to collapse. Some people will be very angry. It won’t be pretty.
It’s taking them 2 years to even evict home owners in foreclosure! How long do you think it will take them to repo your degree?…
Trick question. They can’t. Information is free, and education is about information. We should all constantly be educating ourselves in one way or another. And because I love education, I believe that education should not force people into financial ruin.
As a result of the debt crisis, it will be harder to get money for school from the government
The money is drying up, but not because of anything to do with the educational lending industry – it’s just because the government is shutting down. Education remains as profitable for universities as ever, and their profit margins are growing.
And there is no educational cash cow bigger than our law school system. We’re looking at record unemployment for J.D.s in our country, yet we continue to pump them out at an increasingly fast rate. This is only a microcosom for education in general. I now see advertisements for higher education everywhere I go, and I’m assuming that this is true for many people.
The money they use to fund those ads, as well as their private accounts, is coming directly out of the middle class. USA is becoming synonymous with crippling wealth imbalances – multimillion dollar parties and 1 in 6 citizens going hungry on a regular basis. This is only, again, a microcosom for our world, which has even more striking wealth imbalances. I’m not saying stark equality is the best either, but I’m saying that our system is broken, and that we need to fix it. How? Trial and error.
Macro-experimentation
…is the way we’re going to rise out of this bad economy. The macrohumans in our world need to start experimenting – using trial and error to discover better systems. Forget all the dumb buzzwords you’ve heard recently, you know what they are, and I won’t give them power by repeating them. Think about the situation for yourself, and think of ways that we could run our society better. Show your ideas in the comments!
The earlier we pop the student loan bubble, the better.
Meatier analysis for those who like text better than stock images and sugarcoated formatting:
Demand for student lending is growing continuously, and shows no sign of slowing down. The job market is not recovering, and the lack of hiring forces many would-be workers back into school, forming what I call the student generation: At my age, my great grandfather had packed up and moved to a different country. By this age, my grandfathers had fought in a world war. By this time, my father had a good job at a good company. Our generation, at this age, has a master’s degree.
And who finances this dramatic, quiet, social change? Private educational lending. Debtpocalypse makes money more expensive, which will dramatically contract supply. It will go, like the housing crisis, from easy as 1-2-3 to get a loan to damn near impossible. Overnight. Demand continues its rise up, fueled by low employment figures, and supply disappears… tell me econ people, what happens to price?
It pops like a champagne cork! Champagne for the owner class, that is. The wealthiest 1%. …While the rest of us go into debt to finance it. How much debt are we willing to stomach before we get up and defend ourselves? What do we do when the system is designed for you to be in debt for life? Debtors own more than you think, and money, while illusory, is a powerful mirage, and can conjure human action with more efficiency than any other force on Earth. If dodging creditors is your strategy, I hope you have a back-up plan or two (i.e. fake own death and take a vacation in Thailand for maybe a decade or two).
To put my partisan stance simply, I want the best life for the most people. I don’t care about the name, color, or mascot of your favorite macrohuman, I just want the best life for the most people. This requires action, and the red team in Washington is gridlocking all possible action while the blue team refuses to step up and do what it takes to accomplish anything. When the naysayers have more more assertive ambition than the idea people, it’s no surprise when nothing gets done. That’s why debtpocalypse is not surprising to me.
There are two factors driving up the price of student loans. One, the government will no longer be giving them out. Two, the credit downgrade increases the cost of money for the organizations borrowing money to lend to students – and I promise that they will pass this increased cost on to the students.
The first factor will actually be vastly overshadowed by the growing private student lending industry. They make a lot of money on this, and this market anomaly, inefficiency, will continue to inflate the education system with students. Eventually, most of them will default, and because you can’t repo an education, they’ll garnish wages.
This is the ultimate method of force in this game, and when it starts to be used, the backs of the middle class will crack.
Then things get so crazy that no one knows what will happen.
[...] Debt Downgrade and the Student Loan Bubble | Pythagoreanism … [...]
Wow, so much to chew on here. For the record, I think you’re spot on. Federal student loans and grants are something that gets overlooked when compared to debt devaluation and Wall Street bailouts, but you make a good case that we’re in for more trouble. Without jobs awaiting college graduates, it’s unavoidable that many of these loans will be defaulted on. And yet unlike mortgages, as you correctly point out, there is no bankruptcy option. The government will get as much of that money back from you as they can, whether it means repossessing your car or possibly more nefarious means. I read a story about a month ago where they sent a SWAT team into a Stockton man’s house because his ex-girlfriend had defaulted on a couple thousand dollars.
EDIT: Okay, the DOE is now denying it was over unpaid loans. Who knows what the real deal is.
http://www.huffingtonpost.com/2011/06/08/department-education-raid-default-student-loans_n_873272.html
Anyway, I think the parallels to the real estate bubble here as you’ve laid them out are eerie. Without an advanced degree in economics, I couldn’t tell you for certain what the government’s current take on this is, in terms of how they plan to make their money back. I’m a huge advocate for access to education for everybody, but if they’re giving out sub-prime student loans (as well as free grant money for undergrads), perhaps heavy enforcement really is the only way to prevent another bubble pop.
We’re living in interesting times. By any identifiable measure, our society is the highest educated its ever been, and yet unemployment and underemployment are the highest they’ve been during the information age. Cheap products from China kept our economy afloat for the past decade, but at what cost? The Chinese simply re-invested that money into US savings bonds, which inadvertently lead to the low interest rates that fueled the housing boom and bust. Cheap credit led to massive debt. Americans as a whole are not debt conscious, but they were also led down this path by the banking industry. We will get no radical reform of the banking industry because they run the US Treasury, the IMF, the Federal Reserve and everyone else who helped bury Asia in the 1990s and the US in 2008.
One thing I love about your blog in particular to other financial sites I read is that you appear to be solutions-based, or at least in search of solutions instead of just simply “reacting” like so many others. All I can offer you in terms of a positive outlook was an idea I had recently for a bail-out for public schools. The crux of my argument is that it has been scientifically proven that a country’s GDP is directly proportional to its overall level of education.
http://filipspagnoli.wordpress.com/stats-on-human-rights/statistics-on-gross-domestic-product-correlations/#9
Simply put, if we’re going to get out of this mess, some really smart people are going to have to think us a way out. We need to raise revenue and pour that money back into schools. If you think about it, the modern economy was built on unified philosophical ideologies of Silicon Valley engineers and capitalists. Unfortunately, most of these people were Ayn Rand-objectivist types who were trying to create a one world, government-free society. Such notions as altruism, compassion and unity were anathema to their approach. The next revolution will have to spring from the rank and file, and the only way to do that is to get them educated.
In October 2004, when the laws regarding bankruptcy and Private student loans changed I found myself with $1,750.000 in student loan debt (about the same as a family home is going for in my parts) most of which was private student loans. For years I worked 8-10$ an hour jobs, rotating the few “economic deferments” available for the loans trying to pay rent and everything else. I realized that this was not going to work much longer, and despite already having a BS in biology, and some masters level education. I went to the community college and got an associates in nursing. After two years I more then doubled my hourly wage (at least until health care reforms start…). And while my classmates and colleagues can use that money for new cars, new houses and other things that stimulate the economy in a materialistic society. $700 a month of my money goes to student loans.
“How long do you think it will take them to repo your degree?…”
Here’s the catch, yes they cannot repo my degree, but they can take action against my nursing licenses.
Basically if I default the government in its wisdom will say ‘Since you are not working to pay back these loans you can’t work at all until you start paying back these loans.’
Now if I get hit by a car, struck with the plague or find myself in some other hardship situation Federal student loans have options to help me work thru this. Also there are ways I can achieve forgiveness for these loans. When Private student loans adopted the stricter bankruptcy laws…to be “protected” like federal loans, they were not compelled to offer anything that “protected” the consumer in return.
I cant help think on the fact I sough education to have a nice job where I could afford a home, a car, food on the table with a sense of security and now I am sharing rent in an apartment, struggling to pay medical bills, utility bills and having a third of my monthly income go to student loan debt.
On the other hand if I racked up insane level of debt buying big screen TV’s using credit cards at restaurants, or even home ownership. I could have declared bankruptcy in 2004, and be looking at a clear fresh slate right now.. instead of 30 more years of student loan payments,
You have a very powerful story! Keep checking back here, and feel free to share other sites on this topic, and hopefully we can stick together and protect ourselves. Divided we are weak, but united strong!
Student loans should be forgivable through bankruptcy! We shouldn’t be punishing people with such financial hardship for simply educating themselves, especially when there’s such unclear information available to people when they actually sign their first promissory notes.