Friday, December 4, 2020

Student Loan Forgiveness – the Next Subprime Debacle


In 1979, I was earning a modest $11,000 a year at one of those tedious entry level jobs that some of us manage to get literally hours out of college. All was going smoothly as could be expected for a first timer in the workforce until roughly six months later when I received my first invoice for my student loans.

Between rent, a car and a new work wardrobe, $11,000 goes only so far and the thought of another expense slicing an already thin pie even smaller, I spent a lot of time trying to determine where I could cut costs.

It took four years but somehow, I managed to pay them all off.

Fast forward 40 years.

Student loan debt in the U.S. has now morphed into a $1.6 trillion dollar behemoth with 30 percent or more of borrowers defaulting on loans. To put that dollar figure in perspective, it is about 10 times larger than the Savings & Loan crisis of the 1980s.

Now there are myriad reasons for this – a steep decline in government investment in colleges, the explosion of online learning and last but not least, individual choices of students who eschew more tuition reasonable state schools or community colleges in lieu of far pricier private colleges. Compounding that dubious choice of higher learning institutions many graduates with what I like to civilly refer to as “toilet paper” degrees. Meaning that in the real world, they’re good for little else.

Case in point. I know a woman who attended private college in the Northeast (tuition, not including room and board was comfortably over 50K a year) and graduated with degrees in foreign literature and philosophy. Now could someone be so kind as to forward a list of Fortune 500 companies who are actively seeking candidates with that educational pedigree.

Now the incoming administration has promised to make student loan forgiveness one of its priorities. How much “forgiveness” is still to be determined.

This scenario eerily reminds me of the subprime mortgage implosion of not so long ago. It was deemed okay to offer home loans to folks with FICO scores under 550 and thousands in credit card charge offs. The bride has been in the mortgage business since 1985 including two tours of duty in subprime and I saw one applicant approved for a loan despite a 500 FICO score and 80K in credit card charge offs. Let me repeat that for emphasis - $80,000!

Suddenly when the interest on those loans ballooned after the first year, suddenly the borrowers who didn’t bother to read the terms of the loan and their adjustable rates cried foul among other things and defaulted at an alarming rate. And we all know what happened after that. Recession, bailouts, you name it. Bottom line, the costs were passed on to the taxpayers.

Which is exactly what will happen here. And those like me who paid back their loans I’m sure will be thrilled to shrug our shoulders and say, “no problem, our treat.”

I recently saw a consultant on a financial program explain a rather simple strategy to repair the growing student debt crisis: You take out a loan. You pay it back.

No comments:

Post a Comment