Will Student Loans Fail?
FAIL!
Nearly four years after the housing collapse that caused “the worst recession since the Great Depression,” I think I can speak for us all when I say we are tired of the European debt crisis, global unrest, energy prices, etc. There are some signs the economy is improving. We are adding jobs, albeit slower than we wish. The markets have surged despite all the unsettling news I listed above. I am typically an optimistic person, bullish on America. I believe we, as a country, always invent our way back and find a way to stay on top.
Unfortunately, with every bit of good news, there’s something else on the horizon that makes me nervous. This week it is Tom Raum’s article about a potential storm brewing that could kill any hope for a recovery. This time it is the outstanding student debt that makes me pause.
Here are some scary highlights (or lowlights) from the article.
- Surging above $1 trillion, U.S. student loan debt has surpassed credit card and auto-loan debt.
- Average student loan debt recently topped $25,000, up 25 percent in 10 years.
- 8 in 10 of these loans are government-issued or guaranteed.
- Americans 60 and older still owe about $36 billion in student loans. 60?!?!?
- Nearly 3 in 10 student loans have past-due balances of 30 days or more.
While these numbers are not close to the housing market numbers before the crash, there are some real parallels here.
The housing market collapsed at least in part because for decades our government had encouraged people to own their homes and subsidized this “American Dream”, creating an unsustainable bubble. Remember the “homeowners society”? We created Government Sponsored Entities (GSE) like Fannie Mae and Freddie Mac to expand the mortgage market by allowing banks via mortgage backed securities to lend more money to Americans who basically couldn’t get a loan straight from a bank due to their financial condition. In short, trillions of dollars were loaned out to people who couldn’t afford a house and to speculators who just “flipped” properties. All this extra created-out-of-thin-air money unnaturally inflated the housing market and well...we know how that turned out.
For student loans, we have another GSE, Sallie Mae, providing government backed loans to young people who wouldn’t otherwise be able to afford college. This program has been expanded over and over to the point where billions of dollars flood the university market. In turn, tuitions have skyrocketed. Even worse, a lot of young people who may not have previously been accepted to college are now in debt for thousands of dollars for a degree they never “earned”. Also, in a lousy job market, there are quality graduates who would normally be hired soon after school without jobs as well. Sound familiar? Will Student Loans be the next “FAIL”?
Again, the student loans out there are nowhere near the numbers from the housing crisis, but if this bubble bursts too, it could well make even worse what the Wall Street Journal is calling The Worst Economic Recovery in History.
I don’t want to be all gloom-and-doom here. There are a lot of things that could change. The current recovery could accelerate and lead to more businesses hiring again. The Dow is tinkering with 13,000 lately. Traditionally, robust recoveries usually follow a solid market rise. Will we see it happen here? Let’s hope so.
Be good,
Don Montanaro
TradeKing Bigdog, Chairman and CEO
www.tradeking.com
Follow Don on Twitter, hone your skills at TradeKing All-Stars. You can also follow us on Twitter, Facebook or YouTube.
[Image taken by FunnyExam.com]
Online trading has inherent risk due to system response and access times that may vary due to market conditions, system performance, and other factors. An investor should understand these and additional risks before trading.
(c) 2012 TradeKing Group, Inc. Securities through TradeKing, LLC. All rights reserved. Member FINRA and SIPC.
Unfortunately, with every bit of good news, there’s something else on the horizon that makes me nervous. This week it is Tom Raum’s article about a potential storm brewing that could kill any hope for a recovery. This time it is the outstanding student debt that makes me pause.
Here are some scary highlights (or lowlights) from the article.
- Surging above $1 trillion, U.S. student loan debt has surpassed credit card and auto-loan debt.
- Average student loan debt recently topped $25,000, up 25 percent in 10 years.
- 8 in 10 of these loans are government-issued or guaranteed.
- Americans 60 and older still owe about $36 billion in student loans. 60?!?!?
- Nearly 3 in 10 student loans have past-due balances of 30 days or more.
While these numbers are not close to the housing market numbers before the crash, there are some real parallels here.
The housing market collapsed at least in part because for decades our government had encouraged people to own their homes and subsidized this “American Dream”, creating an unsustainable bubble. Remember the “homeowners society”? We created Government Sponsored Entities (GSE) like Fannie Mae and Freddie Mac to expand the mortgage market by allowing banks via mortgage backed securities to lend more money to Americans who basically couldn’t get a loan straight from a bank due to their financial condition. In short, trillions of dollars were loaned out to people who couldn’t afford a house and to speculators who just “flipped” properties. All this extra created-out-of-thin-air money unnaturally inflated the housing market and well...we know how that turned out.
For student loans, we have another GSE, Sallie Mae, providing government backed loans to young people who wouldn’t otherwise be able to afford college. This program has been expanded over and over to the point where billions of dollars flood the university market. In turn, tuitions have skyrocketed. Even worse, a lot of young people who may not have previously been accepted to college are now in debt for thousands of dollars for a degree they never “earned”. Also, in a lousy job market, there are quality graduates who would normally be hired soon after school without jobs as well. Sound familiar? Will Student Loans be the next “FAIL”?
Again, the student loans out there are nowhere near the numbers from the housing crisis, but if this bubble bursts too, it could well make even worse what the Wall Street Journal is calling The Worst Economic Recovery in History.
I don’t want to be all gloom-and-doom here. There are a lot of things that could change. The current recovery could accelerate and lead to more businesses hiring again. The Dow is tinkering with 13,000 lately. Traditionally, robust recoveries usually follow a solid market rise. Will we see it happen here? Let’s hope so.
Be good,
Don Montanaro
TradeKing Bigdog, Chairman and CEO
www.tradeking.com
Follow Don on Twitter, hone your skills at TradeKing All-Stars. You can also follow us on Twitter, Facebook or YouTube.
[Image taken by FunnyExam.com]
Online trading has inherent risk due to system response and access times that may vary due to market conditions, system performance, and other factors. An investor should understand these and additional risks before trading.
(c) 2012 TradeKing Group, Inc. Securities through TradeKing, LLC. All rights reserved. Member FINRA and SIPC.
Comments
Follow commentsspshapiro posted April 07, 2012 (10:33AM)
Due to a difference of opinion between my father and myself, I knew that the only way I would go to the college of my choice would be if I could fund it myself. At that time (1965), if you had a modicum of aptitude, there were scholarships available. Not all of them were full scholarships, probably most were not, but it was feasible that you could bring down the cost to the point that most middle class families could afford to send their children to college. The fact that I was doing it on my own, required me to borrow and additional $500 a year from the government. In graduate school, I had to increase this but by the time I was finished (1972), I owed about $10,000.
Skip ahead to the year 2000 when my daughter entered college. It cost close to $50,000 a year as an undergrad, and well over that for graduate school. Scholarships were no longer commonplace, and those were hardly more than honorariums. For two years between college and graduate school, she worked for Volunteers for America, which decreased her loans (from college by about 10%), but at the cost of father having to supplement her meager income from the program. Anyway, in her third year of working after graduate school, she still owes well into six figures, while still earning five figures, and she has another eight years to finish paying off her loans.
Although I’ve tried to assure her that this will pass in time, and in retrospect will not seem near as large as it does now, it colors much of our conversations. I’ve tried to emphasize that you should make life choices based on the long run and not the near term pain, but for her the sense of having a debt that she cannot conceive of being free of, is at times overwhelming. And she is one of the lucky ones. First because she has the capability to earn enough (in the future) to handle this, and second, because her parents will stand behind her and she knows that.
Many are not so fortunate. Many will try to say “FU” to the loans, and this will haunt them. Although we don’t have debtor’s prison anymore, there is no legal method for discharging these loans. There is of course the option of functioning in the ‘underground’ economy, where your bank is your back pocket and you carry no credit cards. It is a drastic option, and not one much popular since the 70’s, but I don’t think we want to push people in that direction. The point is the threat that the government holds over those in student loan debt is only powerful (or maybe better, meaningfully powerful) for those who can conceivably pay off the debt.
For those whose skills are not commensurate with getting employment that can fund both their life and their debt, which do you think will suffer? No, I’m not saying the choice is between paying off your Mercedes or your loan, but having reliable transportation to and from work, or your loan. I think that saddling unrealistic amounts of debt on those of a tender age, and worse those without the skills to find work that would allow them the income to service the debt, is counterproductive to having a society that is moving forward. It is killing the goose for the golden egg. And of course, we are not above that.infoisgreat3 posted April 08, 2012 (10:35PM)
The problem Big Dog cites is no different then those I took when taking Structural Design In the late 1960's. Some time later took a position at a college as Director of Physical Plant. By the mid 1970's it was very difficult to find qualified people for the more technical positions. We had college applicants with college degrees who could not write clear reports, sketch or explain what the problem was, and most importantly come up with solution to the problem. At the same time many had 3 point averages across the board from a university or college. (Some were from the University I worked. Yes, the college rose to the University level)
At the same time the foreign students were taking hard courses, math physics, chemistry, life science all types courses that required application of learned facts to solutions to the problem.
Almost all of the foreign students took a minor in the social sciences., finance, government. etc. We wonder how they can compete with us in job market. Simply answered the know the type of information and how to solve the problems encountered in the "work -a day--world".
Mean while our US educated unemployed students are today the ones becoming the shock troops we now seen on the streets -. Occupy Wall Street is just the start.. If you talk to them you will find little knowledge and no idea of what the are talking about. At the same time, highly skilled in debate, misinformation and lack of true facts.
Here, you are looking at the available US future work - force; those - who will be the people in government all the way to the president
spshapiro posted April 09, 2012 (05:22PM)
When you think about it, very little of what you learn (as solutions) is directly applicable to your life’s work. Frequently we hear managers say “We have to unteach them all the bad…. that they picked up in school.”
This is not just snootiness. Frankly most of us engage in dynamic activities that may admit of some standard practices, but usually require constantly updating of our skills. So the best we can hope for from formal education is that we learn how to recognize that we have a problem, have a good decision making scheme for figuring out whether the ‘old’ solution will work, or not. And most importantly, when the old one won’t hunt, have the knowledge of how to go about learning what is necessary to come up with a new solution.
Learning how to think, not what to think, is a worthwhile endeavor. Unfortunately, forty years ago my students, as a whole, just wanted to know what would be on the exam, which came down to ‘what to think’. That is certainly not worth the cost of admission, at least in my mind.snowman posted April 15, 2012 (12:59AM)
Not trying to be a bull or a bear here. School taught the math skills that I have and how to calculate the velocity of money. Stock market however is not a measure of the the economy. Wall Street wants you to think it has to do with earnings. They wanted you to think CDO's were AAA investments too.
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