Saturday, January 5, 2013

The Student Loan Bubble and Bailout

In my blog entitled The Real Cause of Income Inequality, I mention that government expenditures and loan guarantee programs are largely responsible for inflating medical and especially college tuition costs. I also said at the end of that blog that I wouldn't be surprised if student loans were the next government funded bubble to "pop." It looks like it's happened.

From Zero Hedge, the following graphs show the extent of the building bubble in student loans outstanding. Student loans outstanding have quadrupled in 10 years.  But the delinquency rate for student loans just shot up from 9% to 11% in just one quarter---the most recent quarter (Q4, 2012).

(click images to enlarge)
Student Loans Quadruple to $1 Trillion in just 10 Years 

Student Loan Delinquencies Rising--Signal ANOTHER Burst Debt Bubble??

Here Comes The Bailout!

Now comes a little noticed bailout called "Pay As You Earn Repayment Plan" where, from the WSJ and Zero Hedge,
A new federal program should make it easier for some recent college graduates to keep their student-loan payments manageable.
The new option, known as the "Pay as You Earn Repayment Plan," lets eligible borrowers sharply lower their monthly loan payments and qualify for loan forgiveness quicker than they might otherwise.
"It's a very good safety net for students who borrow too much," says Mark Kantrowitz, publisher of the financial-aid site FinAid.org. "If your debt exceeds your annual income, you will probably benefit."
Pay as You Earn, which took effect on Dec. 21, "is designed to help offset the effects of the recession for student borrowers most likely to take a hit in this tough job market," says Lauren Asher, president of the Institute for College Access and Success, which has pushed for the creation of income-based repayment plans.
So, here is a summary of what we have in a nutshell:
  1. Borrow too much (from the government or with gov't guarantees) to have fun in school, paying inflated tuition prices, and earning a degree with no economic value in this economy (or any economy),
  2. Pay a little or nothing at all for 20 years (or in 10 years if you subsequently work in "public service") you're loan is discharged (forgiven) and,
  3. 100's of billions of dollars of delinquent loans are transferred to the Trillions of debt already owed by the taxpayers,
  4. Continue to make loans to students that can never be paid back and,
  5. Repeat process.
Republicans and especially Democrats can never say no!  Does anyone doubt that this new "forgiveness" law will be used fraudulently to get a personal debt bailout?  How insane is it that the government is now providing loans and guaranteeing loans while, at the same time, they are mopping up the rising delinquencies?  Meanwhile, college tuitions are rising much faster than the rate of inflation thanks to this government-enabled spending.  It's another vicious circle caused by the government.

It's even worse than that!  The government caused the mortgage debt explosion and it's subsequent economic collapse. Then the government perpetuates the downturn by failed policies like the just enacted tax increase.. This, in turn, causes high youth unemployment and the "demand" for student loans.

Now that this process has progressed massively in the past 10 years, the subsequent hangover apparently is beginning.  Expect more debt added to the national debt from delinquent student loans.  Add this to all of the delinquent mortgage debt from Fannie Mae and Freddie Mac (government programs) as their mortgages continue to go sour.

The taxpayer barely notices and re-elects the same government again and again!

No comments: