Comparisons between the inflated student loan market and the housing bubble circa 2008 are apt. Both have resulted from heavy government intervention in the lending markets to promote, in the case of mortgages, home ownership and, in the case of student loans, college education.
The housing bubble popped, shoving us into a national economic malaise from which we’ve yet to recover. The student loan bubble hasn’t yet popped, but we seem to be getting closer. Via Zero Hedge, 90 day delinquency rates for higher education are spiking:
From the New York Federal Reserve’s quarterly review of student loans:
Outstanding student loan debt now stands at $956 billion, an increase of $42 billion since last quarter. However, of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter. As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter.
That’s bad, but remember that student loans are a unique sort of loan. Because they’re almost exclusively backed by the government (especially since the Obamacare law essentially nationalized them) there are many deferments and grace periods for paying them back. In fact, almost have of these loans are not in the repayment cycle because they’re in deferment:
As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.
The bottom line: The student loan situation is almost certainly much worse than it appears on paper. And it looks pretty bad right now.
Meanwhile, the higher education industry is carrying on as though this isn’t going on. Tuition rates continue to rise. State schools demand ever larger budgets from the taxpayers. And it’s all justified by this romantic vision of a nation of well-heeled scholars marching off into the work force after the sort expensive matriculation that was, once upon the time, a luxury only afforded nobility or the very wealthy.
And why wouldn’t the higher ed folks behave this way? After all, they get their money up front. If the student graduates and then can’t pay off the student loan debt they’ve accumulated? Well, that’s really not higher ed’s problem now is it?
The only context in which we should be talking about higher education policy should be the context of reducing its costs. And the best way to do that is to privatize both the universities and student lending.