March 27, 2012
Like the housing bubble, which was predicated on easy money and rising prices, student loan lending has increased to unprecedented levels over the last decade.
There is some $1 Trillion in outstanding student loan debt in the United States, the majority of it borrowed by individuals who were sold the idea that they could go to college, party with their buddies at fraternity and sorority houses for four years, get a piece of paper that says they’ve received higher education, and then land a job paying $100,000 a year right out of school.
Somewhere along the way, however, things changed. When these highly educated young adults finally received their degrees, it turned out that all of those hundred thousand dollar jobs they were promised were either exported to countries where laborers are paid a fraction of the cost to do the same work, or they simply evaporated as demand for goods and services in America and around the world collapsed.
With no jobs, no way to pay for their own livings expenses, and a mountain of debt an alarming 85% of 2011 college graduates were forced to move back in with mom and dad after they got out of school.
Now, though full-blown economic recovery is touted as being just around the corner, millions of debt laden graduates are still finding it difficult, if not impossible, to find any meaningful labor, especially the kind of labor that would make it possible for them to pay off those expensive loans. In September of 2011 college loan default rates hadapproached 15%. Six months later, things have gotten much, much worse. According to the Federal Reserve, those rates are rising and fully 27% of all outstanding collage loans are now 30 days or more past due:
In other words at least $270 billion in student loans are no longer current. That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable.
It also means that if the rise in interest rate continues, then the student loan bubble will pop that much faster, and bring another $1 trillion in unintended consequences on the shoulders of the US taxpayer who once again will be left footing the bill.
Fitch believes most student loan asset-backed securities (ABS) transactions remain well protected due to the government guarantee on Family Federal Education Program (FFELP) loans. The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion- $1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.
Why is the bubble starting to pop now?
Several macroeconomic factors are putting pressure on student loan borrowers. The main ones are unemployment and underemployment. The Bureau of Labor Statistics estimates the current unemployment rate for people 20 to 24 years old at nearly 14% and for those 25 to 34 years old, 8.7%. Underemployment is difficult to measure for these demographics, but it is likely having a negative impact.
Actually, no: the unemployment for 18-24 year olds is 46%. Yup: 46%.
Source: Zero Hedge
One in four college graduates can’t make good on their student loans. These are massive numbers, folks.
Those default rates have nowhere to go but up – and yes, we’re going to refer to them as ‘default rates’, because even though the borrowers have yet to technically default, the odds of those back payments ever being made are virtually nil. There are simply no jobs out there for college graduates, as evidenced by the 46% unemployment rate among that age group.
In October of 2010 we warned of the popping of the college loan bubble:
For college grads, it gets even worse. Not only can they not find a job, but they are putting financial pressure on their parents, who will now have to continue providing a home, food, and utilities until such time that their boomerang kid can get some meaningful work and contribute financially to the household. On top of that, they are debt laden with an average debt of over $23,000 once they graduate college. Considering that up until the recession, the average graduate made just $30,000 per year in an entry level position, and the fact that those types of jobs are no few and far between, we can see the potential for a new round of debt-defaults in the near future.
Can anyone say College Loan and Education Bubble?
The theory of “biflation,” one that we have presented to our readers in the past, suggests that there is a possibility of price deflation in debt based assets such as homes, and price inflation in essential goods such as food and energy. We’d mark college education as a debt-based asset, because these days most students depend on loans to pay costly tuition fees.This, like home prices, is simply not sustainable.The very same bubble that was created by easy Fed lending policies has led to a similar situation in college eduction. As credit became loose, and everyone with a pulse applied for a college loan and got one, the price of college eduction rose sharply.
It’s safe to say that we are now seeing the college education bubble collapse right before our eyes.
That $270 billion is only the beginning. Remember, there are simply no jobs out there to offset these loans, so we can fully expect that the majority of these college loans will never be repaid (at least not by those who borrowed the money). The borrowers simply have no means of repaying them.
This is yet another too-big-to-fail that will end up coming out of the pockets of the US taxpayer.
This article was posted: Tuesday, March 27, 2012 at 2:42 am