Student Loan Bubble About to Burst?
Are student loans forming a bubble or what? With almost $1 trillion outstanding, what else would you call it? Yes, I realize that "trillion" has become the new billion, but let's get serious. If you're not sure, check out this article in the Wall Street Journal:
Some characteristics of a bubble include a high rate of growth. Student loans grew at a 4.6% rate in a quarter, which comes to an annualized 18.4%. That's high. But it gets worse.
Another sign that you've got a bubble in an item is when people make completely blithering, irrational decision in deciding to buy the item. And the article gives us plenty of evidence that people deciding to take on (i.e., buy) student loans are making completely blithering, irrational decisions.
One indication of this kind of decision-making is that students and their parents wind up with too much debt. If the national average student loan is somewhere north of $25,000, that means a lot of people have even more than that - some a lot more. Indeed, one case noted in the article is a mother who winds up with over $180,000 of debt, while her child's debt approaches $50,000. Has the student gotten a job? We don't know. But we do know that the mother earns $60,000 per year, which brings up another point.
How in heaven's name does a bank grant an unsecured loan totaling $180,000 to someone earning $60,000, who can barely (if at all) handle her normal monthly expenses? Well, it turns out that 93% of student loans are provided directly by the U.S. government, with no banks involved in the process of granting the loans. The government performs little if any underwriting before giving away the money.
So not only are the people buying the loans making completely blithering, irrational decisions, but the folks granting the loans - giving them away, in fact - are too.
Another characteristic of a bubble is an acceleration of growth. Well, we're covered here too. It turns out that the Obama administration has declared it's intention "to make student loans available to as many people as possible." Don't you think the rate of growth of student loans will not only continue to grow at a high rate, but may well accelerate with this sort of government impetus?
But in the end, what really struck me in this article was the complete lack of responsibility not only on the part of those granting the loans - the government - but the people who take them. The 8th paragraph states that you "can't blame them" for taking on this level of debt because the rates are relatively low and they're so easy to get. It's like free money just lying there on the table.
(Think about this attitude applied to people who eat too much who stuff themselves because they're at a free buffet at, let's say, a wedding. Is it the bride and groom's fault that they stuff themselves? Would you say you "can't blame them" for eating a ton and adding to their existing tonnage?)
So there's some combination of enticement and irresponsibility at work here, the enticement coming from the government and the irresponsibility coming from the debtors.
That's right, it's not free money after all. These people are debtors. They're taking on debt that has to be repaid someday. And it's simply irresponsible for people to get into debt this way. You can blame the government for its role, but you have to hold people responsible too, don't you think?
If people look at this debt as free money, they're either completely bloody stupid or they just don't take their obligations seriously. And debt represents an obligation - an obligation to repay.
So while you can add this government student loan policy onto the long list of government policies that encourage misallocation of capital, you also must face the fact that people are behaving irresponsibly And just because the mother who took on $180,000 of debt and left her child with almost $50,000 of debt just wanted to "get him through" college, it does not excuse the irresponsible decision she made. Period.
I suspect there may be some select number of imbeciles out there who somehow can't help themselves, but I also suspect the vast majority of people simply don't take the obligation to repay seriously. And you watch, they'll be looking for you and me to bail them out one of these days.
The federal lending program designed to make college education available to everyone is creating a pile of debt so large it is fanning worries that it has become too easy to borrow too much.
U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion in the third quarter, the Federal Reserve Bank of New York said Tuesday. Overall household borrowing fell during that period.
Some characteristics of a bubble include a high rate of growth. Student loans grew at a 4.6% rate in a quarter, which comes to an annualized 18.4%. That's high. But it gets worse.
Another sign that you've got a bubble in an item is when people make completely blithering, irrational decision in deciding to buy the item. And the article gives us plenty of evidence that people deciding to take on (i.e., buy) student loans are making completely blithering, irrational decisions.
One indication of this kind of decision-making is that students and their parents wind up with too much debt. If the national average student loan is somewhere north of $25,000, that means a lot of people have even more than that - some a lot more. Indeed, one case noted in the article is a mother who winds up with over $180,000 of debt, while her child's debt approaches $50,000. Has the student gotten a job? We don't know. But we do know that the mother earns $60,000 per year, which brings up another point.
How in heaven's name does a bank grant an unsecured loan totaling $180,000 to someone earning $60,000, who can barely (if at all) handle her normal monthly expenses? Well, it turns out that 93% of student loans are provided directly by the U.S. government, with no banks involved in the process of granting the loans. The government performs little if any underwriting before giving away the money.
So not only are the people buying the loans making completely blithering, irrational decisions, but the folks granting the loans - giving them away, in fact - are too.
Another characteristic of a bubble is an acceleration of growth. Well, we're covered here too. It turns out that the Obama administration has declared it's intention "to make student loans available to as many people as possible." Don't you think the rate of growth of student loans will not only continue to grow at a high rate, but may well accelerate with this sort of government impetus?
But in the end, what really struck me in this article was the complete lack of responsibility not only on the part of those granting the loans - the government - but the people who take them. The 8th paragraph states that you "can't blame them" for taking on this level of debt because the rates are relatively low and they're so easy to get. It's like free money just lying there on the table.
(Think about this attitude applied to people who eat too much who stuff themselves because they're at a free buffet at, let's say, a wedding. Is it the bride and groom's fault that they stuff themselves? Would you say you "can't blame them" for eating a ton and adding to their existing tonnage?)
So there's some combination of enticement and irresponsibility at work here, the enticement coming from the government and the irresponsibility coming from the debtors.
That's right, it's not free money after all. These people are debtors. They're taking on debt that has to be repaid someday. And it's simply irresponsible for people to get into debt this way. You can blame the government for its role, but you have to hold people responsible too, don't you think?
If people look at this debt as free money, they're either completely bloody stupid or they just don't take their obligations seriously. And debt represents an obligation - an obligation to repay.
So while you can add this government student loan policy onto the long list of government policies that encourage misallocation of capital, you also must face the fact that people are behaving irresponsibly And just because the mother who took on $180,000 of debt and left her child with almost $50,000 of debt just wanted to "get him through" college, it does not excuse the irresponsible decision she made. Period.
I suspect there may be some select number of imbeciles out there who somehow can't help themselves, but I also suspect the vast majority of people simply don't take the obligation to repay seriously. And you watch, they'll be looking for you and me to bail them out one of these days.
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