Those of you who have been readers of this blog for a while may recall my June 10, 2011 article about the student loan bubble, which included details about the high unemployment rate among recent college graduates and the debacle of defaulted loans to students at for-profit colleges. Have things changed in the last 14 months? Well, yes … they have gotten worse.
As Dan Amoss explained in The Apogee Advisory, “The real fallout from the student loan crisis will hit in mid-2013, four years after the volume of government funded student loans surged. Like the infamous option ARMs (adjustable-rate mortgages) during the housing bubble, these loans have precisely time fuses: Four years after the loans are made, borrowers must start making payments.” The U.S. Department of Education, which has a massive $452 billion portfolio of student loan receivables (according to the Federal Reserve), has become the equivalent of a subprime lender.
What do the next five years look like for newly minted college grads? Those that hold degrees in computer science or some disciplines of engineering can often still write their own tickets. For liberal arts majors and the like … not so much. According to the Labor Department, 1.9 million Americans ages 20-24 who are not in school are unemployed. The economic conditions and idiocy of our politicians has caused most of this pain. In my opinion, an additional element is that the so-called echo boomers (kids of baby boomers) have often been brought up by their parents to believe that the excess use of credit is okay and that they should follow their career dream, even if it has no clear path to a decent paying job. Those young adults are now getting a cold slap of reality, and I feel for them.
Of course, Federal Reserve Chairman Ben Bernanke is on the case. He recently stated “”I don’t think it’s a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions, but by the federal government.” Did you get that? Student loan defaults are not a problem because the taxpayers will get hit directly by this crisis instead of indirectly with the bank bailouts. His quote is another gem following such wonderful past predictions as:
* “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.” (July 2005)
* “We see no serious broad spillover to banks or thrift institutions from the problems in the subprime market.” (May 2007)
* “The Federal Reserve is not currently forecasting a recession.” (January 2008, one month after the recession started)
Right now, it is quite difficult to get out of repaying a student loan. It is not like defaulting on a credit card or mortgage, where your credit score takes a hit for a few years and then you can move on. Only special circumstances allow one to get out of repaying a student loan. I predict that Congress will make it easier to get out of student loans within the next year, which will help young adults get started without a heavy financial weight on them but will only make the overall student loan program even worse off. One other piece of good news for those with student loans is that the Fed seems to want to keep interest rates low for many more years, which will keep loan payments lower for the students and, sometimes, their parents. However, defaulted student loans are going to be another big hit to the taxpayers.
You all know that the debt crisis is severe nationally, and in most states and municipalities. Last week, Mish shared an interesting analysis of how the U.S. can meet its spending requirements of $3.2 trillion this year. Here it is:
* take 100% of the corporate profits of Exxon, Wal-Mart, and all other corporations
* make the tax rate 100% for all individual incomes above $250,000
* confiscate 100% of the financial assets of super-wealthy folks with Bill Gates and Warren Buffett
* take all of the player’s salaries in the NFL, NBA, MLB, and NHL
That would pay for this year. It would still do nothing to affect our $16 trillion debt level or the $117 trillion in unfunded liabilities. The White House Office of Management & Budget projects federal spending to be $5.8 trillion per year in another ten years. How will we pay for any of this?
The housing market continues to stumble along the bottom with little chance of a significant increase in home values except in a few choice locations. For those of us who are mortgage note buyers or are investors of any sort, these are still dicey times.
Rasmussen Reports found that 14% of Americans expect today’s children to be better off than their parents, only 31% believe the economy will be stronger in a year, and 27% of likely U.S. voters say that the country is heading in the right direction. The consolation to these ugly figures is that more people are how realizing the severity of the country’s problems. Regardless of whom wins in November, don’t expect much effort to solve them.
Alan Noblitt is a mortgage note buyer who helps people wanting to sell mortgage notes. People wanting to sell mortgage notes can contact Seascape directly or view the free information available on the website.