The Student Loan Bubble: Only Stupid People Will Be Surprised When It Bursts

Student Loan Settlement BlogAre there people out there who don’t think we’re heading for a student loan default crisis? That’s a serious question. I’m wondering if there are actual professionals out there who think that student debts are a safe bet? If so, can those people be exiled to one of the PIGS countries where they can breed in their natural habitat?

Today we have more evidence that the student loan market is headed for disaster. We live in a world where the cost of education has become completely disassociated from the value that the education provides. The tuition is too damn high, and there aren’t enough high paying jobs available for all of the young people with enormous debt.

For many recent college graduates, default is inevitable. The numbers are starting to catch up with reality….

The numbers are just staggering. Not surprising, but a stark reminder that we’ve got another huge economic problem that nobody cares about. 

Outstanding student debt has climbed 25 percent since the start of the financial crisis in 2008, according to the Federal Reserve Bank of New York — an increase from $440 billion then to $550 billion now. By contrast, every other major category of consumer debt, including mortgage debt, credit card debt, auto loans and home equity loans, is lower today than it was in the fall of 2008.

Not only has student debt risen precipitously, but more and more of those loans aren’t getting paid off on time. In the second quarter of 2011, the rate of student loans that were more than 90 days past due rose from 10.6 percent to 11.2 percent, according to the New York Fed.

Looking at other major types of debt — again, including home loans, auto loans and mortgage and credit card debt — those delinquency rates either declined or stayed flat for the quarter. But delinquency rates for student loans rose and continue to rise.

You don’t need an advanced degree in pretending you can predict the economy to figure out how this happened. The job market is crappy and people are trying to get more, better, and more expensive education in order to get a leg up. They can’t afford the ridiculously high tuition, so they borrow the money, but at the end of the rainbow, there aren’t enough jobs available.

And when faced with paying for rent or food or clothes or debt, people choose to default on their debts. Happens all the time. It’s a rational, self-interested response to not having enough money to pay for all of your obligations.

And that’s not to say that education isn’t giving people a leg up. It’s just not enough of a boost to cancel out the high cost of education:

The problems of student-loan delinquency and default are only expected to get worse. Salaries and employment rates for recent college graduates have dropped: The median starting salary for a member of the class of 2009 or 2010 is only $27,000, down from $30,000 a couple of years ago. A recent report from Moody’s Analytics predicted that over the next few years, “many students will be unable to service their loans as income growth falls short of borrowers’ expectations.”

On the flip side, do you want to try your luck in this economy with just a high school diploma? I’m not sure I’d hire a college dropout to walk my dog.

The problem is that our colleges and universities are charging a $100,000 to pump out the next generation of dog walkers. Sure, part of the fault lies with the people themselves; parents who let their 18-year-old children borrow a ton of money to go to an expensive private university to major in art history are no better than strung out crack mothers.

But the dean who sits there and says, “come study comparative literary criticism for the low, low price of $40,000 per year,” is the price-gouging drug dealer. These deans are pushing a product at a price point that they know is dangerous for most of their consumers.

Can somebody stop them?

No. Instead the government just made it harder for students to pay back loans.

I swear, I wish I could short “America” right now.

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