by Robert Carbery
Due to the federal government’s own reckless housing policies in the run-up to the financial breakdown in 2008, the world economy came crashing down.
The seeds of the crisis were planted during Bill Clinton’s administration when Congress enacted affordable housing goals for Fannie Mae and Freddie Mac, two government sponsored entities (GSE). These policies ended up loosening underwriting standards immensely as borrowers with little to no credit or job history could borrow money to buy a house. All the while, GSE’s grew from 28.5% of the housing market in 1991 to over 46% by 2003. As the market believed the GSE’s were backed by the government, they thought they would be rescued by the government (AKA the taxpayers) in the event of financial difficulty.
By 2007, the total value of these substandard or subprime loans hit a ridiculous $1.3 trillion. In 2008, the entire financial system was nearly destroyed.
By 2009, 50% of the subprime mortgages were “underwater,” owing more on their mortgage than their house was worth. Interestingly enough, the delinquency rates for all mortgages in the US did not peak until 2010 when it hit 11.5%, which only lengthened and furthered the crisis through Barack Obama’s two terms.
Today, the federal government is once again getting involved where it should not be. A new bubble has now formed due to the irresponsible policies of our government, yet again.
Over the last decade or so, the amount of student loans has exploded from $260 billion in 2004 to over $1.31 trillion today.
Look at that number again… $1.31 trillion in loans to students in America today is larger than the total value of subprime mortgage loans in 2007. And just as the loans were then, many student loans today are in default. According to the Fed’s most recent Household Debt and Credit Report, the student loan default rate is 11.2%, almost what the subprime loan total was in 2010 when its peak.
However, unlike loans for homes, loans to students include no collateral. So, lenders make these loans to students who don’t have to put anything on the line such as their house as security for the loan.
Therefore, when these students don’t pay, someone will take a hit. And sadly, that someone will be you, the taxpayer. This is because hundreds of billions of dollars of these students’ loans are yet again guaranteed by the US government, or better yet, wholly owned by the federal government.
Therefore, this bubble will burst sooner than you think and could be even more painful than the subprime housing crisis of a decade ago.
In post-World War II US economic cycles, we have hit a recession about every ten years. Will we be able to move past this upcoming one and break out of the trend? Or will we fail to learn from history yet again and repeat the mistakes of our past?
The overpriced US college system appears to be at a tipping point.
Is college worth it anymore? The debt certainly isn’t… Even the Financial Times wrote a piece recently of how the US college debt bubble is becoming dangerous for the American public.
44 million Americans have student debt today with 8 million of those borrowers in default.
All the while, rising college costs have become ridiculous. While the consumer price index rose 2.7% between 2016 and 2017, tuition and fees jumped by 9% at state colleges and 13% at private institutions. This has helped the average debt load for American graduates rise 70% over the past decade, to roughly $34,000.
Student debt is linked to many economic conundrums today such as decreased rates of home ownership, higher apartment rental rates, and lower purchases of goods and services overall. The debt loads of Millennials, in particular, is alarming as many graduate from a four-year university or master’s program with loads of money to pay back yet little in preparation to put to good use in today’s ever-evolving job market.
We will not be able to hide from this student debt bubble. The echoes of the housing crisis are all too similar as the debt is seeping into the public from the private sector.
Before 2007, most student loans were underwritten by banks or other private sector financial institutions, The Financial Times pointed out. Today, on the other hand, an astonishing 90% of new loans originate with the Department of Education.
This one could be worse than the subprime mortgage crisis. And as in the prelude to the last crash, no one is talking about it.
MARK CUBAN: “I think the student loan bubble is going to burst” – Inc. Magazine 2017
by Robert Carbery