Remember the housing crisis? Some say it happened because banks had lax lending standards and threw money at so-called subprime borrowers who had no financial standing to have been granted credit in the first place.
But banks didn’t care. Why? Because they were able to offload those toxic mortgages in one of three ways. They sold them to to Fannie Mae or Freddie Mac, the quasi-government entities that dominated the secondary mortgage market, or they consolidated and securitized them, selling them in bunches to hungry investors all over the world who unknowingly were packing their portfolios with ticking financial time bombs.
The bottom line has always been the same: if someone else is always going to pay the piper, there’s no reason not to play as many tunes as possible.
So banks had no motivation not to loan as much money as they could, because they were always safely down the road before anyone realized that the diamond was a zircon, the Rolex was a knock-off and the speedometer had been rolled back 100,000 miles.
Now it looks like we’re in for another financial blow-up. Except this time the explosion will come from the sub-prime market in student loans.
Student Borrowers Owe Billions
By March 2012, nearly a third of the $956 billion in outstanding college loans were made to borrowers likely not to be able to repay. And according to a recent report by TransUnion, one of the country’s three major credit bureaus, one-third of those borrowers were already 90 days past due.
When you consider that these loan balances mushroomed in recent years as students attempted to catch up with rising tuition costs and now carry interest rates near or above 7 percent — as opposed to 2.875 percent as recently as 2005 — it’s no wonder that repayment is getting increasingly difficult.
Here’s the kicker: Because 93 percent of all student loans are backed by the U.S. Department of Education — and because 75 percent of all federal student loans are Stafford loans, which impose no credit standards — taxpayers appear to be on the hook.
The TransUnion study found that between 2007 and 2012, federal loan balances jumped 97 percent while delinquencies rose 27 percent to an overall rate of 12.31 percent as of March 2012.
The brew of badness is not difficult to understand:
- 26 million people having two or more open student loans
- Average student loan debt of $27,253.
- And more than half of college graduates under the age of 25 are unemployed or underemployed
Can you hear the ticking?
The Fair Isaac Corporation, creators of the FICO credit score, released its own student loan study recently, saying that the situation is “unsustainable.”
That’s a word that makes one think of a grenade with the pin out.
Parents Have Also Borrowed Hungrily
Unfortunately, sub-prime student borrowers have company. According to yet another study, this one from the National Association of Consumer Bankruptcy Attorneys, parent borrowing for their children’s college educations has risen 75 percent between 2005 and 2012, to an average of $34,000.
William E. Brewer, Jr., the group’s president says, “This could very well be the next debt bomb for the U.S. economy.”
With all that post-secondary education being bought with borrowed money that risks never getting repaid and with all those college degrees being granted to debt-laden young Americans, it certainly begs the question:
Hasn’t anybody learned how to count?