Student Loan Bubble Mimicking the Subprime Mortgage Bubble

If you went to college or some other form of higher education, there is no doubt that you have had or currently have student loan debt.  As I mentioned in a previous post, education costs are skyrocketing.  Prices are increasing so much so, that they are outpacing the healthcare industry.  No doubt that a major factor in this whole mess is the increased availability of student loans.  I came across this article while reading the news the other day, and it sheds some interesting light into how similar the student loan bubble is to the previous subprime mortgage bubble.

Our friends over at the Consumer Financial Protection Bureau (CFPB) have been receiving a number of complaints into predatory student loan practices, and have begun to investigate.  Their conclusion into the similarities with the subprime mortgage market are as follows:

1.) Misplaced Good Intentions - Society has put such a strong need for college and thus more people want to attend.  Since schools can only accept so many students, the easiest way to eliminate people from the applicant pool is to increase the price.

2.) Misleading Interest Rates - Borrowing when you're an adult is hard enough, but if you are a trusting and misinformed student, you could be really confused.  Someone might not know the difference between an adjustable rate, or fixed rate loan.  Even worse, it's often confusing on who you contact to understand how much debt at what interest rates you have.

3.) Lack of Scrutiny - Much like the subprime mortgage market of the early 2000's, there isn't many people looking over the legality and morality of student lending practices.

4.) Government Guarantees - With the implicit and more recently the explicit guarantees of the department of education, most lenders have become rather lax with their student lending practices.

5.) High Pressure Sales Tactics - Student loan originators make their money by having you sign up.  After they make the loan, it's not their problem anymore.  Therefore, any method or tactic to get you to sign up is a plus in their court.  This has lead to some pressure style lending.

And what are the differences to the subprime mortgage bubble:

1.) Size - Whereas the subprime mortgage bubble was approximately $600 billion, the student loan bubble is much smaller at about $20 billion.

2.) Can't Escape the Debt - Unlike a mortgage in which you could just walk away (and ruin your credit), student loans are not forgiven even in bankruptcy court.  Often times, these loans will literally follow you to the grave.

Do I think this bubble bursting will destroy the economy...no, but it will most likely have a significant effect in the near future.  If anything, hopefully some good lending practices come out of the whole foreseeable mess.

Wonderful Moment of the Day: Had an eye exam a couple days back, and there was basically no change in my prescription.