The government-induced student loan bubble is the next housing bubble
With news coming out earlier this week that presumed-Republican presidential candidate Mitt Romney is supporting, along with President Obama, an extension of low interest rates for government-backed student loans, let's examine the student loan bubble, which has been caused by government intervention.
And if you don't think there's a bubble, take a look at these articles from Zero Hedge describing the nuts and bolts of the government-induced bubble in higher education and a few charts showing how dire the situation is.
As you can see, the amount of student debt being taken on every year has grown rapidly for the last 10 years.
Why have student loans grown this fast in the last 12 years?
Because of the intervention of the government, of course.
A key reason why a preponderance of the population is fascinated with the student loan market is that as USA Today reported in a landmark piece last year, it is now bigger than ever the credit card market. And as the monthly consumer debt update from the Fed reminds us, the primary source of funding is none other than the US government. To many, this market has become the biggest credit bubble in America. Why do we make a big deal out of this? Because as Bloomberg reported last night, we now have prima facie evidence that the student loan market is not only an epic bubble, but it is also the next subprime! To wit: "Vince Sampson, president, Education Finance Council, said during a panel at the IMN ABS East Conference in Miami Monday that lenders are no longer pushing loans to people who can't afford them." Re-read the last sentence as many times as necessary for it to sink in. Yes: just like before lenders were "pushing loans to people who can't afford them" which became the reason for the subprime bubble which has since spread to prime, but was missing the actual confirmation from authorities of just this action, this time around we have actual confirmation that student loans are being actually peddled to people who can not afford them. And with the government a primary source of lending, we will be lucky if tears is all this ends in. (Emphasis original)What the charts can't do is describe how the government-induced student loan bubble is now hurting young adults. The Wall Street Journal though just put out an excellent article describing the impact of this debt in personal terms.
Between the ages of 18 and 22, Jodi Romine took out $74,000 in student loans to help finance her business-management degree at Kent State University in Ohio. What seemed like a good investment will delay her career, her marriage and decision to have children.
Ms. Romine's $900-a-month loan payments eat up 60% of the paycheck she earns as a bank teller in Beaufort, S.C., the best job she could get after graduating in 2008. Her fiancé Dean Hawkins, 31, spends 40% of his paycheck on student loans. They each work more than 60 hours a week. He teaches as well as coaches high-school baseball and football teams, studies in a full-time master's degree program, and moonlights weekends as a server at a restaurant. Ms. Romine, now 26, also works a second job, as a waitress. She is making all her loan payments on time.
They can't buy a house, visit their families in Ohio as often as they would like or spend money on dates. Plans to marry or have children are on hold, says Ms. Romine. "I'm just looking for some way to manage my finances."Now the story of Romine and Hawkins isn't a call for loan forgiveness or reducing interest rates - just the opposite. Artificially cheap government loans and well-intentioned do-gooders pushing too many students to college have done enough damage.
This bubble's going to pop - they always do - and it's going to be painful for many. The best thing we can do now is get the government to quit interfering with higher education financing and let parents and their children, after evaluating the real costs and benefits of higher education, make the best decision for each child.
And as a bonus, once the government stops interfering with the financing or virtual schools take over, tuition will stop its skyrocketing rate of growth, as well.
