This is the way the world ends
Not with a bang but a whimper.
The Hollow Men
In recent years, I have heard speculation that the federal student-loan program is similar to the real estate bubble that developed in the early years of this century and which ultimately led to the national financial meltdown of 2008. Does the student loan program have the potential for running our economy into the ditch?
I once discounted this notion. After all, the home-mortgage crisis involved a lot more money than the federal student-loan program. It is true that Americans now owe about $1.3 trillion in student loans, which is not chicken feed. But compared to the national debt--about $19 trillion--the student-loan program doesn't seem like a big deal. After all, the government's quantitative easing program involved the creation of $1 trillion a year when it was in full swing.
But I'm beginning to think differently about the student-loan crisis based on these considerations:
Enormous growth in student-loan debt. First of all, total student-loan indebtedness has grown enormously over the past 10 years. According to a recent report by the Federal Reserve Bank of New York, total outstanding indebtedness grew from around $400 billion in 2007 to more than $1.2 trillion in 2015. In other words, total indebtedness tripled in less than 10 years.
Indeed, as has been widely reported, student loans now comprise the second largest category of consumer debt, surpassed only by home mortgages. Student -loan indebtedness is now larger than both automobile loans and credit card debt.
More student-loan debtors. Second, the total amount of student-loan borrowers keeps growing--43 million people now have outstanding student loans. That's almost 18 percent of the nation's adult population.
High loan default rates. Third, student-loan default rates are distressingly high. Although the U.S. Department of Education reported recently that three-year default rates are dropping, the drop is deceptive. Three-year default rates are dropping because the Department of Education and the college industry are encouraging students to obtain economic-hardship deferments or other form of forbearance that excuse former students from making monthly loan payments. But the fact remains that a high percentage of borrowers in the repayment phase of their loans aren't making payments,
In fact, as the Brookings Institute reported, 5-year default rates are 28 percent. In the for-profit sector, the five-year default rates is an eye-popping 47 percent! Given the catastrophic consequences of default, it is astonishing that almost half the people who attend for-profit colleges eventually default on their loans.
Discounted tuition rates. Finally, private colleges are discounting their tuition rates more and more, an indication that American families simply refuse to pay the sticker price for a college education. According to an article in Inside Higher Ed, private colleges are now discounting tuition for freshman students by an average of 48 percent!
Obviously, the federal government can't go on forever lending ever larger quantities of money and expecting students to passively take out larger and larger loans for the privilege of going to college.
So yes, there is a student-loan bubble; and the bubble is going to burst. When? I don't know, but I think we will see growing turmoil in the for-profit-college industry and the private-college sector. Within five years, we will see a significant number of non-elite private colleges bite the dust. And we will see increasing pressure on the for-profit colleges.
But when the bubble bursts, I don't think we will witness a spectacular meltdown in the economy that we saw in 2008. To borrow a phrase from T. S. Eliot, the federal student loan program is not going to explode with a bang, but with a whimper. And the people who will be whimpering most are the millions of people--probably 20 million--who simply cannot pay back their student loans and who cannot discharge them in bankruptcy.
In my opinion, everyone in the higher education industry should be praying for more compassionate bankruptcy judges who are willing to discharge billions of dollars in student-loan debt and give millions of distressed borrowers a fresh start. If distressed student-loan borrowers don't obtain some form of tangible relief, we are going to see a shrinking middle class and a class of lifetime student-loan debtors who have been pushed to the sidelines of the national economy by student loan debt from which they cannot shake free. In other words, as I have said before, we are hurdling hell-bent toward a sharecropper economy.
Jesse Bricker, Meta Brown, Simona Hannon, and Karen Pence. How Much Debt Is Out There? FEDS Notes, August 7, 2015. Accessible at http://www.federalreserve.gov/econresdata/notes/feds-notes/2015/how-much-student-debt-is-out-there-20150807.html
Kelly Woodhouse. (2015, November 25). Discount Much? Inside Higher Ed. Accessible at: https://www.insidehighered.com/news/2015/11/25/what-it-might-mean-when-colleges-discount-rate-tops-60-percent?utm_source=Inside+Higher+Ed&utm_campaign=389f6fe14e-DNU20151125&utm_medium=email&utm_term=0_1fcbc04421-389f6fe14e-198565653
Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults
Karyne Williams. Federal Reserve Bank of New York Takes On Student Debt Crisis in New Blog Series. Generation Progress, February 27, 2015. Accessible at http://genprogress.org/voices/2015/02/27/35083/federal-reserve-bank-of-new-york-takes-on-student-debt-crisis-in-new-blog-series/