Student debt bubble will pop

The higher education bubble will pop soon, predicts the wonderfully named David Swindle, who worked as a student loan debt collector and then a “default prevention” manager from December 2007 through July 2009. Collectors rarely collect money, Swindle writes.

Instead my job primarily entailed tracking down borrowers so they could put their loan back into forbearance or deferment so they would not default. Borrowers for loans dispersed between the early ’90s and the passage of Obamacare have a wealth of perks for those who are unable or uninterested in making payments. Lose your job? No biggie, you’re eligible for 2-3 years worth of unemployment deferment. Have a job that’s not paying you much? Chances are you’ll be eligible to use some of your 3 years’ worth of economic hardship deferment. Have other bills that you’d rather pay instead of your student loan? No problem, Sallie Mae and many other lenders offer sometimes as much as FIVE YEARS worth of forbearance time. Well, what happens if you’ve burned through all the time and still want need time off from having to pay? Sallie Mae offered 3 years of Title IV administrative forbearance that had the same qualifications as the economic hardship deferment. Thus, as a collector I’d regularly come across borrowers who had gone YEARS without ever making a payment and the loan’s capitalized interest had just grown and grown and grown — much to the bank’s delight.

When all the deferment and forbearance deals run out and the borrower still doesn’t pay, it usually takes a year of delinquency to put a loan into default.  As loan guarantor, the federal government reimburses the bank for almost everything owed. Then the loan is sold to a collection agency, which will add another 20 percent in fees.

. . . the borrower will often have the opportunity to “rehabilitate” the loan to bring it back into good standing. Usually they do this by making a year or so of auto-debited or at least consecutive payments. Then the loan returns, though much larger. But what also comes back? ALL of their deferment and forbearance options are reset back to zero because it’s basically a new loan. Then the whole cat-and-mouse process of putting off paying the loan, trying to hide from collectors and skiptracers, and letting the interest capitalize more and more can just start again.

The default rates don’t show the number of people who owe more and more on college loans, Swindle writes.

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  1. SuperSub says:

    I’ve been predicting this ever since the housing market dropped. Prices can only inflate so much until the system can’t support them. Strangely enough, the root causes for the college loan bubble are the same as the mortgage bubble – unrealistic expectations that everyone can get a home/degree, even ignoring the financial risk involved with the borrower.

    Can’t wait to see all the out-of-work college “professors” who know little more than obscure trivia and the dearth of non-science/tech schools that will hopefully crash once the bubble bursts and they can’t support themselves.

  2. I’d have to agree here. The bachelor’s degree is the most overrated product in America today, according to Dr. Marty Nemko. The one million dollars in earnings is a outright myth (which you get when you factor in super-earners), but on average, the potential return is between 400,000 and 500,000 dollars factored over 45 years (which works out to about an extra 10,000 a year).

    Another problem is that far too many students who aren’t ready academically go to college (on average, 30 to 40 percent of all students admitted to college from high school need remediation) which causes more expense to the student. On average the bachelor’s degree now takes between 5 and 6 years to complete.

    Also, according to Dr. Nemko, if a student is in the bottom 40% of his or her high school graduating class, the chances of them completing a bachelor’s degree (even with 8 years) is very slim.

    IMO, college has been oversold in this country, and when the bubble bursts, I suspect there will be a LOT of very sore persons holding massive amounts of student loan debt which they’ll have no way to pay back.

  3. SuperSub: I’d agree that the root causes are the same, but I’d say it was because of another rush to confuse correlation with causation. Before government started distorting the market, a number of desirable traits and behaviors were associated with both home ownership and college graduation, so politicians leaped to the conclusion that the latter caused the former. I think it’s far more likely that the former (work ethic, deferred gratification, inherent ability, motivation etc) caused the latter. Simply put, home ownership and college degrees are proxy variables for identification of people with certain characteristics. Unrealistic expectations are also in play, of course, because it will never be the case that everyone has such characteristics. Political correctness is also in play, of course, because such characteristics usually have not been distributed equally across all racial and ethnic groups.

  4. Hainish says:

    “Simply put, home ownership and college degrees are proxy variables for identification of people with certain characteristics.”

    … such as being white and having parents wealthy enough to put you through college. I agree, those “desirable” characteristics _were_ highly correlated with a bachelor’s degree until the government started “distorting” the market with things like the GI Bill. Imagine, students from poor families getting the good grades that those other, more desirable students so rightly deserve!

    And you’re right, of course, that whiteness and parental wealth haven’t been distributed equally across all racial and ethnic groups.

  5. Student loans are an unrealistic carrot that a capitalistic society uses to put a huge amount of people into debt.. there is no home or prestige with obtaining a degree. It is actually reverse… If you DON’T have a degree it is now a means to exclude very qualified, and sometimes overqualified individuals from obtaining desirable positions. Sure there are doctors and lawyers who will always need them… but retail management?!? Very basic supervisory positions?!? We wonder why our wages are going down in this country….

    The debt bubble will pop due to unrealistic promises.. take my own example.. $10 k in debt and did not finish. Not because of lack of desire or determination.. but because it took a real job to pay the bills in the interim. I am still paying this loan 10 years later..

    Deferment .. forebearance…. both ways for banks to dig you deeper in debt while the Gov promises to pay the loan.

    I have the option (income contingent) to never pay this loan in my life. With a family of 5 what sense does that policy make?!? Sure I don’t NEED to pay. But interest will continue to apply and ultimately squeeze working individuals to the point where they can no longer get loans or persue things “promised” to you by completing a field of study.

    Many educated and Degree’d individuals are out of a job today because of the actions of many foul legislative moves. Let’s not blame Obama on the governments distortion. Follow the money. Take a look at which institutions and private companies stand to gain from this bubble.

    “It’ll make sense to privatize everything now….” Said the Chesire cat!