Students

Student Loans: The Next Bubble to Burst?

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Asset-backed securities come in all shapes, sizes and, in some cases, levels of destruction.  The meltdown of subprime mortgage-backed securities triggered the collapse of the credit markets and rise of the Great Recession.

Could student loans, which, too, are securitized and face rapid defaults, be another market bubble on the brink of a burst?

Recent data obtained by the Chronicle of Higher Education concludes 20% of federal student loans that entered repayment in 1995 have since gone into default. And analysts’ recent notes about the market for student loan asset-backed securities (aka SLABS) offer a somewhat supporting argument that the trend will only get worse:

  • Earlier this year Standard and Poor’s Ratings Services voiced concerns about pending legislation in Congress that would let borrowers toss their private student loans away under Chapter 13 bankruptcy, much like credit card debt or auto loans. If the proposal becomes law, the S&P believes “there is an increased risk that recovery rates could decline and default frequencies could increase as borrowers look to use bankruptcy strategically.” Overall the ratings agency has a negative outlook on the SLABS market.
  • Ratings agency DBRS noted this year that “the performance on existing private student loan asset backed securities throughout 2010 may well continue a long term trend of deterioration as a new slug of graduates enter repayment in a very challenging economic environment characterized most notably by a weak job market.”

But Mark Kantrowitz, publisher of FinAid.org says there’s no threat of a bubble bursting. In fact, he argues, there’s no bubble to begin with.  A bubble involves investor speculation leading to extremely inflated prices. But the price of a college education, Mark says, is “driven largely by fundamentals.” “There is no secondary market for buying and selling a college education,” he says.

He also stresses the fact that most student loans – about 90% – are federally-backed and guaranteed. So if the relatively small market for private SLABS goes belly up, it wouldn’t cause much of a stir.  “Even if there were an increase in default rates, it wouldn’t cause a collapse of the capital markets,” says Mark. Plus, as he points out, federal education loans since July 1 of this year have been made through the Direct Loan program, which, again, stem from the federal government.  “[Student loans] don’t suffer from liquidity constraints…or more to the point, if the US Treasury were to have trouble raising funds, we’ve got bigger problems than just student loans,” he says.

Mark is pretty convincing, but I’m not closing this debate here. Maybe it’s not a “bubble” but this is a brewing crisis that demands critical attention. More to come, including my interview with Alan Collinge, author of “The Student Loan Scam: The Most Oppressive Debt in U.S. History — and How We Can Fight Back. Collinge is also the founder studentloanjustice.org.

Image by The/Waz via Flickr

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  • mlimberg

    Student Loan Debt, just part of your education…. get over it. I paid on mine student loans until I was 50…. So what’s the issue?

    • Mark Dean

      GO EFF YOURSELF MLIMBERG!!!!!!!!!!

    • jay

      The issue my friend is that a generation ago college tuition was lower, the government subsidized education more heavily, students didn’t have to rely on private loans, and our economy offered graduates decent jobs that could support repayment plans.

  • Jennifer

    The problem is that 25 years ago a college degree was worth something- and got you better paying jobs than those people only with High School diplomas. Today, degrees are worth nothing because everyone has one. A college degree isn’t an achievement, it’s an expectation. In this day and age, the cost of going to school is more than the value of a degree.

    Plus, it was your generation that conditioned mine to the belief that college was what we should be striving for, so for 18 years all we got out of you was “do well in school so you can get into a good college”. So when an entire generation grows up with those expectations of them, and we go to college thinking we’re doing the smart thing (because yet again, that is what we were told) when the reality is that my degree is NOT going to get me a job, but instead put me debt with a system that is impossible to get out of… well. How is that fair at all?

    18 years old and i am adult enough to take out $100k is student loans, but not old enough to drink alcohol. They wait to give you that privilege until you’re graduating and realizing what shit hole you’ve been shoved into.

    • http://www.leaderquestonline.com/ Denver Sharepoint Training

      Great comment!

  • Lisa

    When my mother tells me she paid off her student loans — with a well-known loan agency, I might add — at $40/month, and current graduates are looking at payments as high as $500/month, something is wrong.

    Nobody should have to go into debt to learn. I figured, if anything, everyone should be presented with the opportunity to learn and change their lives. College is not an elitist club that you can only attend because you come from a dynastic fortune.

  • bunny

    The student loan scam/bubble is economic poison that is going to wreak havoc on this generation. It is impossible to work your way through college after community college. Most careers don’t just require a bachelor’s degree, they require a graduate degree. The only realistic hope that a person without a trust fund from their parents or a fully paid scholarship has is to go into debt about $50,000 for a Master’s degree. That’s the average person. I haven’t mentioned doctors and lawyers, who graduate with closer to an average of $100,000 in debt. Now, that average person graduates and walks out the door into an economy where 15% of the working population is either un-employed or under-employed because of systemic rather than cyclical employment with no hope in sight for sustained job recovery.

    I am a Generation X person, but what the current generation graduating from college hears is exactly what I heard when I was in college 15 years ago from the assclown hippies who gave us this mess. Take out the loans! Go to the best college you can! The debt is worth it! Pursue your dreams! Don’t settle for something practical, do what you love and the money will come! The debt it is no big deal! Peace, love and groovy.

    My daughter is approaching high school graduation and does not want to go to college, despite being highly intelligent. She has a plan for getting technical training and working for herself in a virtual field. It’s a good plan. It’s a better plan than getting a Bachelor’s degree in this economy.

    Bush Administration laws on bankruptcy desperately need to be repealed- but not just for private loans.

  • http://www.singlemomfinancialhelp.com/the-big-deal-about-bank-loans/ Celine

    So if that money goes into default…shouldn’t we get that money back!

  • Soothsayer

    The “College” of Phoenix and other educationally related scams are going to cause another recession. They sell their worthless product using easy student loans and big promises as a tool. In many of these scams, the student borrows all the money up front, takes the first part of a course and then finds the remainder of it is worthless or do it yourself learning in the library. The completion rate is 4% and employer acceptance is nil since they can get workers who graduated from regular, on campus, accredited institutions. It is time to shut the water off on these scams now.

  • Sheila

    The problem is our educational system. When I graduated High School you could get a job that now you need a degree for. Our educational system stinks. My daughter is going to college. I always preached education to all my kids. Some kids go to college for a four year party. I told my kids that when you graduate, move out , and are paying your own way then you can party. I still feel college is important. It just cost way to much.

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