Student loans in America: Nope, just debt - The next big credit bubble?

Student loans in America: Nope, just debt - The next big credit bubble?

www.economist.com

IN LATE 1965, President Lyndon Johnson stood in the modest gymnasium of what had once been the tiny teaching college he attended in Texas and announced a programme to promote education. It was an initiative that exemplified the “Great Society” agenda of his administration: social advancement financed by a little hard cash, lots of leverage and potentially vast implicit government commitments. Those commitments are now coming due.

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“Economists tell us that improvement of education has been responsible for one-fourth to one-half of the growth in our nation’s economy over the past half-century,” Johnson said. “We must be sure that there will be no gap between the number of jobs available and the ability of our people to perform those jobs.”

How did we get here? Will this bubble "pop"? When it does what happens to our children? And what of their children?

It is speculated that Johnson's inclination to establish his premier domestic programs, generally referred to as the "Great Society" was, at least in some part, borrowed from John F. Kennedy's "New Frontier." Perhaps President Johnson was hoping to take advantage of the momentum his predecessor had achieved, after all, up to that point,according to political journalist Theodore White, "... under John F. Kennedy, more new legislation was actually approved and passed into law than at any other time since the Thirties." As a matter of record, 33 of 53, then 40 of 54, and finally in 1963, 35 of 58 bills proposed by Kennedy were passed by Congress; a fact routinely overlooked by partisan critics.

Apparently, both Johnson and Kennedy had agreed on at least one point. Future American prosperity required, in large part, the elimination of poverty and racial divison stresses... both flaws could be directly marginalized by improving education in the country.

Whether we call it the Great Society, or the New Frontier, the initiaive led to the same result.

To fill this gap Johnson pledged an amount that now seems trivial, $1.9m, sent from the federal government to states which could then leverage it ten-to-one to back student loans of up to $1,000 for 25,000 people. “This act”, he promised, “will help young people enter business, trade, and technical schools—institutions which play a vital role in providing the skills our citizens must have to compete and contribute in our society.”

It is exceedingly important to note something many overlook in the above statement: "...from the federal government to states which could then leverage it ten-to-one to back student loans..."

This is, in fact, proof of the use of fractional reserve lending; which some of us still refuse to see for what it is. The creation of money out of nothing, and the subsequent burden of credit interest on that non-existent money from the debtor to the private bank issuing the loan. The bank pays interest on the 1/10th to the reserve from which the "reserve" money comes, you know the rate to which I refer; it's the one the Fed charges any bank in the system. Of course, the student pays a much higher rate on all 100% of the loan. And the money that didn't exist, that was created for the transaction..., the tax-payer pays the principle and interest on that too. This money, like all federal expenses, was "borrowed" for this purpose by the government to enact this program. This is how a 1.9 Million dollar expenditure turns into $19,000,000 loans. These 'secured' loans form the reserve revenue for more fractional reserve lending beyond that... It appears to be the obverse of the most powerful force on Earth, "compound interest."

Almost a half-century later these modest steps have metastasised into a huge, federally guaranteed student-loan industry....

Johnson’s lending programme was altered almost straight away. The intention of providing students with an education through “business, trade and technical schools” was expanded to include the full, imaginative panoply of American education, regardless of economic utility. Interest rates and terms have all been adjusted numerous times.

"...[students] must choose between an array of products, including subsidised and unsubsidised “Stafford” loans via the William D. Ford loan program, loans directly from the government, “Plus” loans (for parents of dependent children) and “Perkins” loans, plus an array of private options.

On top of all this, there are choices about how to consolidate, restructure and pay the debts. Many students are understandably overwhelmed...."


The student debt which we refer to is significant considering the amount of attention it has received:



Over 10 Million loans last academic year
30% of graduates and nearly 70% of dropouts bear that burden as they enter the job market.


- The New York Federal Reserve Bank reports $550 billion in debt (this may be an underestimate, according to their own report)
- Sallie Mae reports there are $757 billion-worth of outstanding loans
- An unnamed bank heavily involved in the area says there is at least another $111 billion in purely private loans with new lending estimated in excess of $112 billion for this year alone

The total amount outstanding will pass the $1 trillion soon.

Critics allege a viciously wasteful circle: the size of the loan pool expands to enable students to pay ever higher fees to schools whose costs expand because money is coming their way. That was just about sustainable in the good times, a lot harder when there are fewer jobs to be had.

Signs of strain are everywhere. In September the Department of Education reported that in 2009 the default rate, which is defined as non-payment for 270 days, had reached 8.8%. By some estimates delinquency rates, an earlier indicator of stress, for student loans exceed 10%, ten times that for credit cards and car loans....

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I found this interesting, pehaps you will too...,

This is despite punitive laws to enforce repayment. In response to clever students burying their obligations in court during the 1970s, anti-default provisions were imposed to make it almost impossible to shed student loans in bankruptcy. In 1991 the statute of limitations for non-repayment was eliminated.

The ability to avoid life-crushing student debt was removed starting as early as 1991; why Was the ability for banks and lending institutions to 'write off' that bad student debt as a capital loss, not similarly eliminated?

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There are increasingly loud calls for reform of the system, with demands that range from a full-fledged bail-out of borrowers to a phased curtailment of government lending. For now the bail-out is the bigger priority for politicians. For many years government-backed loans were distributed through banks which earned a fee and occasionally had to assume a little bit of risk, but in 2009 the business was entirely absorbed by the federal government.

The changes announced this week are designed to ease the pressure on struggling graduates. Borrowers who qualify will get payment relief, not debt relief. Their payments will be capped at 10% of income rather than 15%, but interest will continue to be applied to their underlying debt and may expand rather than contract over time. There will also be forgiveness after 20 years, rather than 25. The administration says these changes will have no cost to taxpayers. If there is one lesson of the past 46 years, it is to be dubious of that claim.

There's the plan.... Why am I not ressured?

www.economist.com
(visit the link for the full news article)

Allow me to add this as well. A presentation that CNBC did concerning the cost.
I think it adds to what you are saying.

CNBC: The Price of Admission

My favorite argument is that they knew what they were doing. Of course they did; they took the risk so that they wouldn't have to work at McDonald's for the rest of their lives. These folks forget, conveniently, that if they get in a jam and can't find a job, they can declare bankruptcy and have a bad credit score, but they get out of debt. Try discharging student loans that way.

My second favorite is that "I worked my way through school, they should have too". Forgetting, or just plain being ignorant, of the fact that college costs are 4 times what they were even 20 years ago. Tuition at my local college is 250% of what it was ten years ago, let alone when some of these people from my parents' generation were going to school.

Yes, the student loan bubble is going to burst, and nothing is going to stop it. Do your kids a favor and tell them to skip college. They'll be working at McDonald's, anyway, but without college at least they won't have the debt.

Student loans are killing me..and if they weren't so ruthless..I would just say Fck it and not pay..but they are like the IRS and will hunt you down.

Ron Paul is the only one talking about this, how crazy is it that only one person is talking about bankrupt depts.

Ridiculous!

reply to post by ModernAcademia


I have to admit it does shake my ability to trust in the collective judgement of our society.

After being taken in by housing and e-commerce bubbles (to the tune of more money than can be conceptualized,) we face the exact same conditions with yet another industry, coaxed into existence from government spending, and yet we "don't want to talk about that." Paul's a lunatic....

I work at a University and have quickly become persona non grata in certain circles for commenting on the nature of the higher education gravy train (never mind the research and "incubator" scams) across the country..... color me "upstart."

Eventually I suspect I will be "ejected" for my candor. But their refusal to call a spade "a spade" does not discourage me that perhaps, barring efforts of the 'status quo' worshipers, people will awaken to the point that is brought home.... education should be about neither revenue generation nor political expedience....

Our society has become so warped as to find itself in the most incongruous place. Artists who ostensibly live to create art; teachers who, purportedly, choose a vocation of spreading knowledge; doctors, who claim to care for patients above all other matters... all noble and critical aspects of our community, seem to be living and performing their crafts primarily to amass wealth.... or is it their paymasters who make it so? Perhaps this is another middleman thing? And why not... it's all about capital gains, isn't it?

This argument has no end.

Great...first my taxes go to pay for those who are too lazy to find employment.

Now to top it off my taxes go to pay (or forgive) student loans, paperwork they signed by the way, so that these idiots that infest our educational systems can later tell me that I need to pay even more taxes later in life.

Lovely!

Bankruptcy will not get rid of student loan debt fyi. I haven't had a job in years so I filed for deferment on both my loans. One company accepted and the other didn't, I explained to the company who denied the extension I don't have the income to pay but they didn't seem to care.

Canada has already surpassed the 1 trillion mark, we have a max though, and we surpassed that long ago. You should see the canadian student loan bubble burst before the US.

Or perhaps you will pop first, But i know what its like. I have 40k in student loans, and while that is not really 'that bad', i applied for repayment assistance, which has helped me not be completely broke. So i pay a fraction on my loans every month, if they come back and tell me i have to pay the full loans every month, i wont be able to do it +rent + food + bills. Just wont happen, and i have a job in my field!

>.

Originally posted by TDawgRex
Great...first my taxes go to pay for those who are too lazy to find employment.

Now to top it off my taxes go to pay (or forgive) student loans, paperwork they signed by the way, so that these idiots that infest our educational systems can later tell me that I need to pay even more taxes later in life.

Lovely!

Your taxes go to pay federal loan interest. Nothing else, nothing more.
Stop attempting to troll, generalization is annoying.

Originally posted by Maxmars

Student loans in America: Nope, just debt - The next big credit bubble?

Maybe its not too late to implement a "means test" for repayment like here in Australia.
Your requirement to pay the loan back is linked to whatever income you are getting.

The HELP scheme here for students is such that if you earn less than $44912, then you pay NOTHING back for that financial year.
As your income goes higher, you progressively pay more of that HELP loan back.

At this point, I don't think a bubble can be properly attributed to anyone thing, I think the housing bubble was an exception, but now, the bubble is people not being able to pay their bills in general.

Originally posted by alfa1

Originally posted by Maxmars

Student loans in America: Nope, just debt - The next big credit bubble?

Maybe its not too late to implement a "means test" for repayment like here in Australia.
Your requirement to pay the loan back is linked to whatever income you are getting.

The HECS scheme here for students is such that if you earn less than $44912, then you pay NOTHING back for that financial year.
As your income goes higher, you progressively pay more of that HECS loan back.

Must be nice, if im employed at all, i have to pay on my loans. The only way i dont pay on them, is if i am unemployed. 44k a year?! Thats more than i make right now, haha, i still get taxed out the ass too.

Originally posted by AzureSky

Originally posted by TDawgRex
Great...first my taxes go to pay for those who are too lazy to find employment.

Now to top it off my taxes go to pay (or forgive) student loans, paperwork they signed by the way, so that these idiots that infest our educational systems can later tell me that I need to pay even more taxes later in life.

Lovely!

Your taxes go to pay federal loan interest. Nothing else, nothing more.
Stop attempting to troll, generalization is annoying.

Not trolling...complaining. There is a differance.

I pay cash as I go through life.

Why should I pay for others when I don't ask others to do the same for me?

I believe in charity, but it goes to those who I feel deserve it.

Although it is through heavy disappointment from my direct family members, I have not allowed my child to get student loans. I go through this argument on a weekly basis. I am told I am hurting my child by not allowing her to go to school, which is not the case. I am told to just bite the bullet and get her the loans, but I refuse every time. I am not going to allow my child to go take out 30k+ loans, on the hope that she will find something. I am not going to put her in the position to be owing money before she ever even has a chance to get her own life going. I have a few benefits that I can let her use, but we are paying as we go. Sure, it may take a little longer but at least she/I will not owe anything. There is no way I am going to let her rack up this much debt this early in life.

I finally paid off my loans for my degree when I was in my 30's

Problem now is that college or a decent degree doesnt get you anywhere. Right now the non degree holder can make as much as an McDonalds employee entry level and not have enough to survive much less pay the loans off. There was a time when self education and hard work made it possible to not only find work, but attain the "American dream". Not so in the new America. People have been trained to think you are stupid or uneducated if you do not hold a degree and certainly not worthy to hold a decent paying job along side those who have a degree... regardless if you can do the work at the same level as the degree holder. We are discounting a huge portion of very useful, productive, and sometimes brilliant people by demanding a piece of paper for everything rather than assessing ability and aptitude. Im telling you, if I had a business and needed employees Id not demand a degree... Id demand ability and drive. Im telling you, America died a long time ago and we all slept through its death.

My area has become very economically depressed. Degree or not, youre not succeeding. Do you know what many of my oldest daughters friends are doing to feed themselves and be self supporting? Joining the military. Either you cant pay back your educational loans because there are no or low paying jobs for degree holders or you cant get hired without the degree in the first place if you need to support yourself immediately. Rock and a hard place.How fortuitous. Want to eat and not be homeless? Join the Mil. This generation has every right to be pissed off beyond belief as they are set up for failure and attachment to the machine from birth now.

This is a particularly huge problem for law school students (other students as well, I'm sure). Here was a good article in the NY Times concerning "law school economics". Rising tuition rates + using statistics to flat-out lie to potential students + accepting more and more students (for more free government money) in the face of less jobs = a disaster waiting to happen.

NY Times Article

Why do they get these loans when the 'education' that it pays for is so dumbed down a monkey could get a degree. ?

reply to post by VforVendettea


There is a distinction that, in our current society, we must make.

You can go to get a degree.
or
You can go to get an education.