The Next Big Shoe to Drop – Student Loans

More than 40 million young Americans carry federal and private student loan debt – amounting to over $1 trillion. Defaults are on the rise and the issue has grown to become a nasty wealth transfer mechanism, as well as sad example of the failure of finance in general.

This week, President Obama announced a new initiative framed as a way of addressing the issue. Sadly, it is far from the mark, and just one more indication that monetary masters are the real puppeteers.

Many have pointed out that the student loan debt bubble could be the next subprime crisis.

Perhaps so, but it is potentially much worse, acting as an anvil when considered in the context of other consumer debt like car loans and credit cards.

The student debt debacle has the potential of corrupting not only education, but a generation as well.

It risks becoming the blight on a generation of would-be productive and innovative work force.

Furthermore, the workforce declines, and falls behind, as more students return home to live with parents. And the extra burden on multi-generational households adds yet another deflationary force to the natural trend.

From the perspective of bankers, policy makers, and the propaganda machine, college loan programs have been a tremendous success, providing access for students who would otherwise not be able to afford the privilege.

It is about threading a narrow political path.

Defaults are on the rise and the notional value of student loans went north of $1 trillion.

Servicers must be getting nervous; the lobbyists are circling the wagons.

There is no clear indication of who will pay for it – or how.

Defaults on the rise; one in seven currently default.

The news of doing something comes around to yet another intervention with all the familiar signs that it is meant to save the financiers and has very little to do with helping students.

The problem is that this is too little too late.

Student loan debt is a trillion dollar reality in the context of a major, ongoing depression.

We are a Nanny state – with almost 50 million on food stamps and more on some sort of assistance. Labor force participation is at 40 year lows.

There is already a major dis-incentive to work. If you take a horrible minimum wage job, you lose valuable benefits, entitlements.

Which, incidentally, also explains why while it took the U.S. economy 6 years to recover all the job losses since Lehman. This took place at the expense of 13 million Americans leaving the labor force for good even as the U.S. population rose by 15 million.

It also means that using a historical average participation rate, U.S. unemployment is over 11%, while underemployment is currently well in the 20% range – a far more realistic assessment of where the U.S. economy really is.

People on assistance programs are literally paid to stay home – think of the cultural implications.

It’s almost a conspiracy. You have a massive class of under the table people with no voice. Give them bread and circuses.

The student loan debacle is another story.

For the parents, the typical situation is framed by skyrocketing tuition; and little help from scholarships become fractions in the face of rising tuition.

The income cut-off for need-based financial aid is low.

Parents are expected to contribute 25% of pre-tax income to the cost of tuition.

If you earn $80K a year and your child’s college tuition is $20K, you get nothing in terms of need-based financial aid. And that 25% doesn’t count room & board, books, etc.

So, it’s basically impossible for middle-class families to send their kids to college without taking out student loans. In fact, the entire higher-education system is built to force people into debt if they want to send their kids to college.

And it has a sinister underlying theme…

It’s always about the “irresponsible student” or the “hairdresser subprime loan borrower” who “should have known better”.

They should have known that housing prices eventually fall, even though “everyone” in the mainstream, including the chairman of the Federal Reserve said they would not. They should have read carefully the fine print instead of trusting the fancy loan officer.

And everyone knows that without a college education you will not succeed, so “borrow whatever it takes”. You’ll pay it back.

Two decades of further tweaks to the bankruptcy code ensued until 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This Act made it so that no student loan — federal or private — could be discharged in bankruptcy unless the borrower can prove repaying the loan would cause “undue hardship,” a condition that is incredibly difficult to demonstrate unless the person has a severe disability. It essentially lumps student loan debt in with child support and criminal fines — other types of debt that can’t be discharged.

But our system is perfectly fine going after the invisible – those without a political voice – whether the poor or elderly who get crushed by inflation, or the 18 year olds who get out with $100K in debt and an art appreciation degree.

But the price of education should tell an even deeper story….

Quality of Education Suffers 

The compounding irony is that not only does the price of education go up, but the quality goes down. Institutions become entrenched. There is little incentive evolve, tenure runs rampant. And the curriculum declines.

Higher education becomes both a commodity and a spectacle. Not a vehicle for progress or a reflection of the needs of the culture or the economy.

That may not be hyperinflation…but it’s very sad. College education quality has not risen proportionately with price.

Student loan debt is out of control by any and all measures. It’s a debacle that benefits no one besides the banker and the servicers. The schools lose by making themselves unviable in the long run.

The students come away with non-dischargeable student loans and enter a world without, for the most part, having any marketable skills.

Sadly, the student loans are just one more politically untouchable issue providing yet another source of highly flammable fuel that will result in more gasoline when the Fed is called in.

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