Oct 20

US Student Loans – Next Financial Bubble?

Remember the sub-prime mortgage financial bubble collapse a few years ago? If the potential home buyer had a pulse and could sign the mortgage loan application it was a deal. No one (broker, lender, Federal Reserve, Congress) looked too closely at the details or asked too many questions. There was too much money to be made moving the paper and riding the expanding real estate bubble. Once the bubble popped, everyone got torched.

The US economy still has not recovered with extensive “shadow inventory” of defaulted housing on US banks balance sheets waiting to go through the bankruptcy process. Why waiting? The US banks want to delay recognizing losses on their balance sheets (i.e., mark to market) in addition to adding to the glut of housing, depressing prices even further, reducing their balance sheets even further. It is not surprising that investors are hammering the US banks and will continue to do so until they are fully deleverage of this toxic mortgage debt.

If you were in the call-center outsourcing business during the run up of the mortgage financial bubble, you were inundated with programs to market to the consumer. These programs were generally sales lead generation, hot transfer to a loan officer, or some variation. You were probably making a lot of money while the bubble lasted and then BOOM it all stopped.

Well, look out now but the market for US student loans is nearing that stage of bubble expansion. US student loan debt is now at $830 billion having surpassed credit card debt. Read that again. All those plastic cards in your pocket and those of every other consumer in the US now represents less debt than student loans. This concept would not have been possible to conceive of 20 years ago.

Who is to blame? You have to go back to where the rules of the game are made and changed: Congress. In 1965 Congress (Democratic controlled) approves the Higher Education Act allowing millions of students to apply for Federal guaranteed student loans. In 1978 Congress (Democratic controlled) approves the Bankruptcy Reform Act disallowing discharge of student loans in bankruptcy for the initial five years of the loan period (too many doctors and lawyers were filing for bankruptcy after completing their degrees). In 1998 Congress (Democratic controlled) eliminates the ability to discharged public student loan debt in bankruptcy, along with loans related to criminal acts and fraud. In 2005 Congress (Republican controlled) amends the Bankruptcy code to eliminate the ability to discharge private student loan debt in bankruptcy. Now all student loans, public and private are virtually impossible to discharge.

Currently the percentage of student loans in default after15 years of repayment are:

  • government – 25% (1 out of 4 students)
  • community colleges – 30%
  • 2 year for profit colleges – 40% (2 out of 5 students)

Note that there is no statute of limitations on repayment of student loan debt. The student debtor will pay, even if it is deducted from their Social Security checks! The student literally will be a slave in debtor´s prison the rest of his/her life. It is not surprising that participants in the Occupy Wall Street protests include many students who are unemployed, unable to repay their student loans and don´t see a way out of their debtor prison.

Using the sub-prime mortgage market as a parallel, more than 40% of current US home mortgages are under water; owing more on their mortgage loan than their house is worth. At some point the homeowner simply leaves the keys in the mailbox, walks away from the loan and considers the option of bankruptcy. The student however does not have the same option of filing for bankruptcy.

For additional details on the Student Loan Racket.

So, if you are currently marketing to the US student loan market, it would be wise to make plans for some major changes in the future.

Nexus Teleservices