The next massive debt bubble to crush the economy


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The next massive debt bubble to crush the economy

  1. 1. The next massive debt bubble tocrush the economy – 10 chartsexamining the upcomingimplosion of the student loanmarket. $1 trillion in studentloans and defaults sharplyincreasing.mybudget360 in bailout, banks, debt, economy, education, i-banking, student loans, wall street In the land of predatory bubbles it looks like higher education is now fully caught up in thecredit market implosion. In the same debt produced vein as housing, college used to be a relativelycheap bet with decent results in the long-term. Even if you went to public universities and picked up adegree in a field with low job prospects, at least you didn’t have the cloud of student loans hangingover your head when you graduated. Today it is a very different ballgame and the mythology behindcollege is being used to lure people into institutions that are little more than paper mill factories. Evenquality institutions are having a harder time justifying tuition and fees that cost upwards of $50,000per year (or the median household income of an American family). Can the next major crisis comefrom the student loan market? There is currently close to $1 trillion in student loan debt outstanding.During this crisis most debt sectors contracted except for student loans. Let us examine 10 charts tosee why a bubble in student loan debt is about to implode.Chart #1 – Student loan balance rising
  2. 2. Moody’s Analytics came out with a comprehensive analysis of the student loan bubble. The datapresented does not add confidence to the problems occurring in higher education. More to the point, itis the way people are financing their college endeavors. Part of the problem is college costs aresoaring while incomes are stagnant or falling. So you have graduates coming out with heavier debtburdens and their incomes are much lower. It is a mathematical problem that was destined to causeissues. As the chart above shows, high cost states which already eat deeply into middle class incomesalso have the highest student loan balances only doubling the problem in these states.Chart #2 – New loan originations growing
  3. 3. It is an odd sort of American situation where the economy contracts but the student loan market isexploding. No other country faces this kind of issue. Yet this is symptomatic of our current perpetualbubble banking system that is designed to increase liquidity in all sorts of markets so Wall Streettraders can make a buck on suckering the public into more debt from previously secure sectors likehousing or even education. Origination volumes are even higher as more people jump into the highereducation bubble feet first.Chart #3 – Student loan balances keep growing
  4. 4. Student loan debt now surpasses total credit card debt in the United States. While you hear horrorstories about credit card debt all the time there is very little discussion on the epidemic of student loandebt. The chart above doesn’t account for the recent trend and it is very likely that we are quicklyapproaching $1 trillion in total outstanding student loan debt. Keep in mind that the above chartdoesn’t cover the total cost of education as you also have many students financing books and otherexpenses on their credit cards compounding the debt burden.Chart #4 – Average debt levels
  5. 5. The economic crisis hit in 2007 yet through this time the average student debt levels have increased.This is not a positive development especially when data from the job market is so poor. The fact thatmore debt is being taken on is troubling for a variety of reasons but one of the most insidious is thefact that many recent graduates are starting to pay on loans with no jobs or jobs that pay just enoughto get buy. This is the issue of a low wage capitalism system that has a financial system designed tofilter money back to the top one percent through crony politics and protection.Chart #5 – Higher education enrollments rise
  6. 6. This is where things get dark and remind me of the housing bubble. Historical data for an entiregeneration showed only home price increases. That is an exceedingly good record. But investmentbanks and their government colleagues then decided to turn a once safe investment into a casino byusing historical trends that just don’t justify the modern day irresponsible corruption in our bankingsystem. The same kind of argument is being used for higher education. Pundits point to historicaltrends but keep in mind, these are trends that occurred in better times when people weren’t leavingschool with insane amounts of debt and entering the worst job market since the Great Depression. Asthe chart above shows, enrollments are moving steadily up because of this mythology that is beingperpetrated.Chart #6 – College costs versus other costsNo other sector in our economy has seen costs rise so quickly like those of colleges. Tuition and feeshave far outpaced every other sector in our economy even surpassing items like healthcare andhousing which is hard to believe. But just like housing, since incomes have gone nowhere for decadespeople are simply financing the pursuit without looking at the real long-term costs of what they arediving into. Being educated is incredibly important. That goes without saying. But how much is toomuch when it comes to tuition? There is a difference from a nicely built large home in a good areagoing for a nice amount of money versus poorly built McMansions selling for levels not justified byincomes in those areas. The same goes for a college education. Just because someone adds a“university” or “college” to their title or institution does not make it worth the money.Chart #7 – Rise of for-profit enrollments
  7. 7. This is really where a large part of the paper mill action is happening. Many for-profits are simplydesigned to siphon off money from unknowing students and saddle them with unsupportable debtlevels in exchange for a piece of paper that isn’t worth it. It is no shock that for-profit enrollmentgrowth shot through the roof with the de-regulation of Wall Street in the late 1990s. Just likesubprime loans and exotic financing for-profits are a large player and this only occurred in the last 10years or so. These institutions have enormous marketing budgets and staff that basically fill outfinancial aid information for students to exchange paper for paper. This game is going to end and weare starting to see major cracks in the system.Chart #8 – Default rates at for-profitsDefault rates at for-profit institutions are soaring similar to subprime debt in housing. Yet what else doyou expect? Employers who are hiring can pick up graduates from name brand schools instead ofgoing with for-profit schools where many simply get a piece of paper with no measurable track record.The default rates are simply a reflection at how extreme the system has become. For-profits are the
  8. 8. most egregious problem in higher ed but even name brand schools are having issues with student loandebt levels.Chart #9 – Default rates to riseGiven the turmoil in the economy default rates are projected to rise. So where does this burden fall?Most of these loans are backed by the government but are issued from banking institutions. Do wehave another debt crisis in this sector? I believe we do. Ultimately you will have back breaking studentloans that don’t allow strategic defaults like strategies being employed in the housing market. So whatwill students do if they don’t have the income to pay these loans off? Who takes these losses? Theseare things that we will soon find out unfortunately.Chart #10 – Employment by education level
  9. 9. Source: Business InsiderThe chart above again reflects this recent trend. A 4-year degree no longer protects you with secureemployment. For the first time in our record keeping history do we have over 4 percent of those witha 4-year degree unemployed (roughly 1 out of 4 working Americans has a bachelor’s degree orhigher). Yet recent graduates have it much worse. This figure will soar as many more paper mills pushout graduates with very little real world employment prospects.We can see where this higher education bubble is going but in the meantime, you have investmentbanks and those connected in the government making money hand over fist on the exploitation ofworking and middle class Americans. I think many Americans are being educated for free on how thesystem is currently rigged.