Lenders hand out money with scant regard to the borrower’s ability to repay.
The borrowers use the money to make a big-ticket purchase, and the sellers happily stuff the money in their pockets. What do they care if the borrower can’t pay it back?
When borrowers ultimately default, the taxpayers pick up the tab.
Sound familiar? Does the great housing price bubble come to mind, along with the foreclosure disaster?
It sure does. But this column is about student loans. Could they be the next consumer bust?
Education debt is soaring. Student loans stood at $1.2 trillion as of May, up 20 percent since the end of 2011, according to the Consumer Financial Protection Bureau. That doesn’t include debt that students put on the credit card, or that their parents put on the house through home equity loans.
Student debt is now second only to mortgages on the list of things weighing down family budgets.
Tuition has been rising faster than personal income for decades, but that’s the smaller factor behind the recent debt explosion. The Great Recession gets the bigger blame. It squeezed family finances, and they haven’t yet recovered. Students borrow more because families have less in the bank.
Meanwhile, the weak job market is causing more people to seek new skills, taking on debt to pay for it.
Rohit Chopra is the consumer bureau’s student loan ombudsman. He was in St. Louis last month for a symposium on student debt sponsored by the Federal Reserve Bank of St. Louis.
Chopra draws lots of parallels between the mortgage bubble and student loans today. In both cases, those making the loans and pocketing the money have little interest in seeing it repaid.
“Posh U” arranges a federal student loan and gets the money, but it’s not on the hook if Joe Student goes broke. Hence the bath of advertising from for-profit colleges on daytime TV, hoping to reel in the idle.
All this reminds us of mortgage lenders who made bad loans, then sold them off to the government-sponsored mortgage companies, which guaranteed them. Home sellers got paid. So did the lenders. They made Uncle Sam the sucker.
More than 80 percent of student loans are federal or federally guaranteed.
To be fair, no lender can assess the credit of an 18-year-old. The loan is a bet on the kid’s future. (Private student lenders usually require a parent’s guarantee.)
So the government must rely on the schools to admit people with ability, then give them the training they need to get jobs.
How are they doing on that? Well, the default rate on federal student loans stands at nearly 15 percent and rising. Any bank with such a default rate would be out of business, but Uncle Sam can’t go broke.
Default rates are truly spectacular among the for-profit schools, where tuition is often high. It’s common to see 20 and 30 percent of their students go broke three years after leaving school.
Obviously they’re admitting the wrong students, giving them poor training, or both.
The Obama administration proposed denying student loans at schools with the most horrid default rates. It eased the rule somewhat after strong lobbying from the for-profit schools, and they’re still beating the bushes for students.