Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

There is a significant difference between the two lending fiascos, but mostly in how the fallout will look. Both the mortgage crisis and the student loan crisis started out as government programs meant to incentivize borrowing. They succeeded, mortgage debt rose 12%/yr in the years leading to the crisis, student loan deb at 11%/yr. Student loan debt now outpaces credit card and auto debt, and is 2nd only to mortgage debt. An increase in easy borrowing lead to higher prices in both cases, in the 10 years leading up to the housing recession, home prices went up 80%. In the last 10 years tuition prices have risen by also 80%. Not a problem if the value of the home or degree continues to rise, but labor income for college grads hasn't grown in 60 years. At all. In fact, if you adjust for inflation there has even been a slight decrease since 1960. Currently 30% of student lending ends up in default, but this number is also growing quickly and projections show this number at 40% by 2025. Sub-prime defaults were around 11% at its peak, so the rates of default for student lending are WAY worse than those of sub-prime mortgage lending, even though the total debt is significantly less. The big problem w/ sub-prime lending was the inability to pay them back (obviously), and same is happening with student loans - due to a lack of underwriting. You can't exactly repossess a degree, and even if you could the value on the 2nd hand market would be null. Filing bankruptcy would make mortgage lending debts go away, but that isn't the case with student loans, which will remain in perpetuity. True, overall mortgage debt was about 10x what student loan debt is at its peak, but there haven't been large derivatives markets set up to eat it like what happened with the mortgage collapse. Since the student lending default overage is going to be WAY more than what the US Government will be able to recoup from Social Security checks or income tax refunds, the person who will ultimately foot the bill for this lending crisis will not be insured banks; it will be you, the taxpayer, and ultimate the economy writ-large. Unless payroll wages somehow magically jump high enough to cover the stagnation we've experienced since the 1960's - unlikely without intervention.

It won't be easy for our economy to recover from this downturn either because the issues will be cultural and systemic. The course-corrective measures would be lenders locking out lower-income families from colleges, which prevents economic mobility and leads to a faster collapse of our middle class. Colleges will maybe drop tuition rates slightly but tuition is largely sticky, unlike housing prices. This may even lead to some colleges going out of business. Loans will likely start to be under-written appropriately, but this means degrees will be prioritized based on earnings potential, which means only a narrow field of study (medical, lawyers, tech, etc) will be eligible for lending. Schools may even price degrees differently, meaning schools will likely trend towards degree programs with the largest earnings potential, to the detriment of many other crucial fields of study. Ultimately college will become an institution to perpetuate a narrow focus of study, and only to those already in positions of wealth - which will further hasten the collapse of our middle class.

The student lending crisis is already having far-reaching economic slowdown implications, from decreased home ownership, higher rental rates, to lower purchasing of goods/services overall; with no clear indication of how to easily course-correct. Not to mention a worsening of cultural and systemic issues already in place. We may not be smart enough to even realize what hit us until it does.

Edit: forgot to say non-dischargable goes back way before that switch. I have personal experience around 2001, but I'm pretty sure it goes back to the 80's.

The role of government regulation is a separate question, but we're really jumping the shark when we can't even acknowledge basic cause and effect.

It's not surprising that government policy making tons of student loan money available led to more students being willing to take out bigger loans. This is like Markets 101.

It's tough to take opponents seriously when basic, predictable side effects of favored policies are ignored just to recommend heavier-handed policies of the same kind.

We would also need to remove the social stigma that has plagued the trades for the last 30+ years.