Student Loans- The Next Bubble

The say the ticket to success is an education unless it bankrupts you along the way.

In case you’re unaware, a student loan bubble is brewing that’s set to explode. The crisis is looming large in terms of outstanding debt and is beginning to worry a lot of people.

Currently, there is $1.4 trillion in outstanding student loans which are growing at about 20% per year. This debt is greater than the national debt of many countries.  By our own government’s metrics, roughly 1 in every 3 loans is either not being serviced or is in outright default!

Presently, at more than 1,000 schools (representing about one-quarter of all U.S. colleges and other schools) over  half of its students have already defaulted or failed to pay any amount toward these loans within seven years of leaving school. In other words, according to the government’s own data, at least 40% of this debt – representing more than $500 billion – will never be paid.

Even more alarming, much of this debt was packaged up, “securitized,” and sold to investors around the world as “good” debt. Given the “implied guarantee” of the U.S government for these loans, global investors bought them up. Once again,   they will go bust just as the loans guaranteed by Fannie Mae and Freddie Mac went bust.

If the economy was as good as the pundits claimed, and education as valuable as the universities claim, these students would all have jobs and payback on these loans would not be an issue. But, my countrymen and women like to believe in fantasy and so they believed in the tale Obama and the media told them.

The tale?  All is well in the U.S. economy.

Adding insult to injury, student debt cannot be discharged in bankruptcy.  So, even if the former student has no job and thus no way to pay back the loan, he or she will be forever be obligated to pay it back. There will never be an escape from the indebtedness.

In times past, there existed debtors’ prisons, where people who could no longer pay back their debts were incarcerated and put to manual labor until their debt was paid in full. As our society advanced, sane people recognized that this was no way for a rational society to resolve an economic problem. Bankruptcy courts were set up, the discharge of debt, in whole or in part became common practice.

To the contrary, the student debt problem harkens back to ancient times as these people will never be able to discharge their debt.  While they will not be imprisoned, at least not for the moment, the looming debt and the pressure to pay it off will seem as if they are. Furthermore and perhaps most disturbing, is that should government and its agencies of enforcement continue to grow in size and in power, a crisis (economic or otherwise) puts an indebted person in the weakest possible position…and the least autonomous.

Bankruptcy, the settling of debts and forgiveness of loans, is quite common in America. Businesses as well as frequently  use the legal process of bankruptcy to settle up with creditors or wipe the slate clean to start again. President Trump, by way of his corporations, has used the bankruptcy courts on numerous occasions to “settle up” his finances.

One of the main reasons that the U.S. is so successful in the business world is how we view risk, failure and success. We inherently understand that life is risky, business life particularly so in a free market, and so we  have mechanisms in place to deal with failure. Failure is never final. We can begin anew. In other cultures, such as Japan, failure is so avoided and its reality so disgraceful, that people so “afflicted” choose to commit suicide as the rightful end to failure. That culture even has a name for these individuals: “evaporating people.”

In U.S. tech world, the purview of private equity investment, the risk is that only about 10% of those companies will ever make any money.  When the odds on happens, investors don’t come screaming and threatening to put the company’s founders in jail; they don’t try to relegate them to debtors prison. They know life and business is inherently risky and failure happens.

Failure: We all dislike it. Prefer to avoid it. Don’t plan for it…but it happens.

What makes the pending student loan crisis even more sickening is that it is penalizing the youngest and most vulnerable segment of our society. The ones we have convinced of the lie that a college education is imperative to their future success no matter what the cost. These students are coming out of college with a bill due of over $37,000 and with, at best, uncertain job prospects. The debt for those coming out of graduate and professional schools is multiples of that number.

We have two massive problems on our economic horizon: 1) 1.4 trillion dollars of mostly uncollectible debt and, 2) a weak labor market yet to be addressed. There are currently over 95 million unemployed Americans. You are deemed to be in the “labor force” if you have a job or are looking for one. You are counted part of the participation rate if you are in the labor force. But we have 95,000,000 Americans no long in the labor force! They don’t have a job and/or have stopped looking for one.

Both of these critical issues need to be faced and reconciled. If not, the U.S economic recovery will continue to falter even following the miracle Obama recovery I must have blinked through.

 

Steve

sleeclark@gmail.com