
Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says - prostoalex
https://www.npr.org/2019/12/09/785527874/student-loans-a-lot-like-the-subprime-mortgage-debacle-watchdog-says
======
planetzero
We need to get rid of student loans. The problem is that Universities don't
ever need to worry about a student defaulting and can keep increasing the
prices of tuition with impunity. If they default, they don't care, because the
money is already in the bank.

If universities had to worry about students defaulting, they would get rid of
bullshit degrees that don't result in an actual job and the prices would come
done due to free market forces.

~~~
mAEStro-paNDa
It's insane to me how quick some folks are to dismiss what they deem "bullshit
degrees".

It's our culture that has turned education into some kind of "investment" in
future job prospects. To put it simply, education was never intended to be
that way, nor should it. It's as if studying the arts is some kind of luxury
for those who are already financially well-off.

Education is _supposed_ to be about learning just for the sake of learning,
which benefits all of us. If there is not a place for people from certain
fields of study, that's a failure of our economy and priorities. Yet it seems
that too many have just accepted the current reality as "just the way things
are".

~~~
int_19h
It's meaningless to talk about what education was "intended" to be, because it
varies from society to society, and changes over time. In general, _we_ as a
society decide what it is intended to be about.

But if you are going to look at history, then why not go all the way to the
root of the modern Western academia - where the word itself originates?

[https://en.wikipedia.org/wiki/Platonic_Academy](https://en.wikipedia.org/wiki/Platonic_Academy)

On one hand, it was indeed about learning just for the sake of learning. But
on the other hand, it also didn't have degrees, positions, tenure, or any
other attributes of a formal hierarchy.

And note that it was something that people did _aside_ from gainful employment
(or other source of income). Which means that it was closed to most, not even
because they weren't welcome there, but because they didn't have the free time
to devote to learning for the sake of learning.

Could we revive the Academy today, free for everybody? Sure, but I don't think
this would solve any of the problems with "bullshit degrees".

~~~
dillonmckay
I enjoy learning about new things and I also work full-time, so a system that
could accommodate that style of learning would be my choice.

------
magnusss
It seems like the majority of the commenters here are missing the point. The
increasing rate of student loan default is not a result of kids who go to a
four year college, graduate with an unmarketable degree in philosophy, fall on
hard times and then can’t pay their bills. It's kids who go to barber or
cosmetology school, take on $30k of debt, then realize they don't make enough
money cutting hair to support themselves, much less pay back a loan. There's a
huge population of people like that. Source: [https://www.ed.gov/news/press-
releases/us-department-educati...](https://www.ed.gov/news/press-releases/us-
department-education-releases-national-student-loan-fy-2014-cohort-default-
rate)

~~~
apatters
Sure, the most relatable problem is that a lot of college grads have debts
they can't pay off.

That's not really the focus of the article though, which is an introduction to
a potentially calamitous systemic problem.

The 2008 crash happened because there were about $1.7T of mortgage-backed
securities (MBS) floating around in the financial system. These were
essentially sliced up pieces of numerous mortgages that had been made to
credit-unworthy home buyers. When these buyers started defaulting due to a
weak economy, the MBS became worthless and financial institutions started
going belly up.

So with that said, here are a few facts:

\- There's about $1.6T of outstanding student loan debt today, and it's
growing.

\- Many of the borrowers who took out these loans are demonstrably credit-
unworthy, as the .gov link demonstrates, they are already defaulting in
growing numbers.

\- Sure enough there's a thing called SLABS out on the market (Student Loan
Asset Backed Securities). Very similar to a MBS but the collateral is student
loans.

I don't know how widely SLABS are spread throughout the financial system at
this point.

There are also differences vs 2008, biggest one is that most of the student
loan debt is government guaranteed.

That last point gets used to promote SLABS but it seems to me that it just
makes their value leveraged to political winds. Here is an example scenario:
economy softens, leading many holders of student loan debt to vote for Bernie
Sanders because he promises to forgive their debt. He gets elected and follows
through on his promise. SLABS all over the system become worthless, banks end
up much poorer than they thought they were, and the death spiral begins again.

I don't know what will happen, you can't simplify the workings of the economy
into tweets and soundbites. But there is certainly cause for attention and
concern.

Further reading:

[https://www.investopedia.com/articles/investing/081815/stude...](https://www.investopedia.com/articles/investing/081815/student-
loan-assetbacked-securities-safe-or-subprime.asp)

[https://www.natlawreview.com/article/rmbs-to-slabs-
history-r...](https://www.natlawreview.com/article/rmbs-to-slabs-history-
repeating-itself)

~~~
eli_gottlieb
Right, so the difference here is that you can be foreclosed on, and the bank
takes your house. You can even go bankrupt when you lose your house.

But you can't get out of student loan debt via bankruptcy, nor lose the
education. I figure the banks figure they're going to be fine, because rather
than the SLABS market collapsing, it'll just suffer a correction: the enforced
debt peonage of making payments all one's life will ensure those "securities"
represent (forcibly and fraudulently extracted) income streams.

~~~
apatters
Except that all of those angry debtors can vote, and elect representatives who
change the applicable laws. So one way things are different this time around
is that government action could precipitate events in unpredictable ways.

Remember Bernie is talking about straight up forgiveness: the debt just
disappears. He probably won't be the next President but student loan reform
(including existing loans) is a hot topic for many candidates.

~~~
sokoloff
Any forgiveness is likely to be executed by the forgiving entity _paying off_
the loans.

The federal government is not going to use a pen to steal trillions of dollars
from lenders holding contracts for repayment. That’s a banana republic action.

~~~
vonmoltke
The federal government _is_ the one holding all that debt, so that is exactly
what is going to happen.

~~~
sokoloff
There is a high 8/low 9 digit inventory of private student loans, not held
federally.

------
rayiner
All this talk about student loan forgiveness is an unnecessary solution to a
problem that’s not really that bad:
[https://www.nytimes.com/2018/04/02/upshot/an-
international-f...](https://www.nytimes.com/2018/04/02/upshot/an-
international-final-four-which-country-handles-student-debt-best.html)

Average BA holders in the US graduate with $28,000 in debt, versus $21,000 in
Sweden. The Swedish system is basically like our income-based-repayment, which
we have had since the 1980s. Except, as you’d expect with Sweden, there is
less paperwork and fewer gotchas. Simply tweaking the PAY-E system Obama
created, to add automatic enrollment and automatic annual income verification
based on tax returns, would get us a system that has proven workable in
Europe. All without trillion dollar loan forgiveness or radical changes. (And
with, in my opinion, a fairer system of redistribution, where those who needed
loans and got high paying jobs subsidizing those who needed loans but didn’t
get high paying jobs.)

(And simply tweaking ACA would get us pretty close to the Dutch model of
health insurance. But that doesn’t get headlines.)

~~~
diogenescynic
Why was it necessary to change student loans to being non-dischargeable in
bankruptcy? That is a recent change and it shifts the burden from banks having
to evaluate the loans they are making which would likely mean fewer loans and
thus less money earned from interest. It seems like student loans should be
treated like any other unsecured loan. And really student loans shouldn’t even
be necessary for public universities but that’s another point.

~~~
gwright
Because it is an unsecured loan. It would be too easy for a newly minted
graduate to declare bankruptcy, discharge the loan, and move on with their
life. The only entity stupid enough to loan money to students in that world
would be the government.

~~~
swagasaurus-rex
The missing wisdom here is that maybe the government should take on a high-
risk, societally high-reward investment like education.

~~~
gwright
That sounds nice but it requires there to be a definition of "societally high-
reward education". That is difficult. Even if you find some methodology to
identify the quality programs that have an appropriate "societal reward" you
have to deal with the problem that the costs for those programs will
inevitably rise in lock step to the amount of tax dollars used to subsidize
them. (See
[https://www.newyorkfed.org/medialibrary/media/research/staff...](https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr733.pdf))

I would suggest the federal government get out of educational loans entirely.
Let the private loan market evaluate and take the risks, probably with an
income based repayment contract that favored degrees/programs that are likely
to lead to reasonable incomes.

~~~
pinkfoot
Steve Jobs had an English degree. Would most STEM obsessed industrialised file
that under 'favoured'?

~~~
gwright
Who knows? Like I said that is a difficult decision and I'd rather those
decisions be made by individuals. They can decide if taking out a loan to get
an English degree is worthwhile. And if they can't find someone to loan them
the money, they may have find a different approach.

------
ethagknight
Except in the subprime debacle, millions of people could declare bankruptcy
and walk away. With student loans. The debtors are simply screwed with no
recourse. That’s a big difference.

~~~
chiefalchemist
Silly question: is there any legal way to default on a student loan? Can that
be exploited? En mass? Perhaps?

~~~
tehjoker
Here's the thing... when you do it en mass, it doesn't matter if it's illegal
because nobody can do anything to stop you. It's called a strike.

Apparently the people that started
[http://rollingjubilee.org/](http://rollingjubilee.org/) were originally
working on a student debt strike project. Not sure exactly why they switched
to a medical debt project, but it's certainly a worthy one.

~~~
jrs235
>Not sure exactly why they switched to a medical debt project

My assumption is that the government and lenders of government guaranteed
loans aren't selling the delinquent accounts for pennies on the dollar.

~~~
vonmoltke
There are no "lenders of government guaranteed loans" anymore, and there
haven't been for at least nine years. Either the government _is_ the lender,
or it is a completely private (and dischargeable) loan.

~~~
jrs235
Thank you for the correction/clarification.

However I still have a government guaranteed loan that was issued by a bank.
If I default on it that bank isn't selling my account. They'll garnish my
wages. Also I never plan on paying off my loan early! It's only 2.25% apr! I
got lucky. Rates were really really low when I graduated and consolidated my
loans.

------
psaux
My wife and I lived a very simple lifestyle for years (7ish) after college so
we could pay off student loan debt. Awesome Ford Tempo car, local honeymoon,
Studio apt for first 5 years, limited eating out. She has a masters (more
loans), and is a teacher. So that made it even tighter.

Is there any data on if folks with student loans are living above their means?
I.e new TV’s, new car lease, vacations, ordering out.

I am serious when I ask, as I read a ton, and can’t get to the root. I hear
many different anecdotes. This is a serious problem, and I am truly out of
sync on the main causes of payback ailment.

~~~
m463
> Is there any data on if folks with student loans are living above their
> means?

Literally every single friend of mine bought a new car when they graduated
from college and got a job. Anecdotal, but I suspect it is more common than
people realize.

It doesn't mean they were living above their means, but I think buying a new
car at the start might be a financial misstep.

~~~
hermitdev
I think it depends on the car and the job.

I graduated in 2003 and had to buy a car. I was driving an 88 Chevy Blazer
that was starting to hit around $750 per month in maintenance. Final straw was
when a cylinder was losing compression. This was already on an SUV that had
its engine rebuilt and had more than 165K miles on it. It had a Kelly Blue
Book value of about $100.

So, couple months out of college, I bought a modest Chevy Cavalier. Monthly
payments were 1/3 of what I was paying in repairs, around $240/month. I could
afford the car payments, I couldnt afford the monthly repairs.

I didn't buy my first fun car for about another 4 years. By then, had a well
paying job, only debt was what lingered on the previous car loan. At the time,
didnt have a great salary, probably around $100k, but I was getting generous
bonuses. Every bonus I had went to paying off atudent loans before I did
anything more than a couple hundred splurge. I think that I had my student
loans paid off in the first 3 years at my first salaried, full time job.

I think the key, for me, is that when my income tripled from when I was an
intern, I didn't change my lifestyle. I lived the same, with a slightly more
expensive so I could be closer to work & public trans. Everything went to
paying down debt.

I think this is the misstep for younger people that suddenly come into earning
a lot more money: more money in, increase the life style and spend the
increase in income. It's an easy trap to make. And no, I'm not ragging on
Millenials. Its a problem that has happened to previous generations in the
same situation. I think it might be a lack of personal financial maturity (you
know, out on your own, gobsmacked with more money youve ever seen in your
life), not a generational thing.

Edit: clarification about exspense on the old vehicle

~~~
greedo
"didn't have a great salary, probably around $100K"

I think you're incredibly disconnected from what most people are making four
years after graduating.

------
corporate_shi11
Time to eliminate government funded student loans. Most of the kids going to
college now shouldn't even be there in the first place.

I was doing volunteer work a few years back, speaking to some kids from the
local community. One said he was going to a 4 year college, probably paid for
by the government given the circumstances. Said he wanted to study "coaching".
And our tax dollars are paying for this...

~~~
AsyncAwait
This is the reactionary right-wing Twitter take, but for every coach, there's
computer science, engineering & biology students suffering under massive,
unforgivable debt.

Yes, student loans need to go, but not so that people don't go to college.
That should be free for undergraduates in today's economy, where you need high
level ed. for what used to be done by people who barely finished high-school
30 years back.

~~~
aiphex
I think university education also makes more intelligent, socially and self
aware members of society. Even if it doesn't directly lead to a career in a
chosen field, it produces better people who hopefully make better employees.

~~~
malvosenior
This is definitely not the case in 2019. Almost everyone has a degree and a
lot of people demonstrate almost no ability to think for themselves.

------
ahnick
Let's say that one thinks eventually a large percentage of for profit private
colleges will have to close their doors. (think small ones that no one has
ever heard of, not your Ivy's) What's the analog to The Big Short here?

~~~
arthurcolle
There are asset-backed securities called SLABS (student loan ABS) that I guess
you could make some kind of credit swap out of if that's what you're into.
Probably super expensive to construct such an instrument since it like isn't a
super liquid market.

~~~
wtvanhest
That is one route, or I think the better route may be cds on revenue bonds for
public or private schools. Should be cheaper cds, but just as damaged as the
crisis rolls through

~~~
arthurcolle
Mind explaining this strategy a little bit more? I'm not really up to speed on
any other fixed-income instruments outside mortgages.

------
vxxzy
The value of secondary education has been diluted by the massive pool of
"paper" floating around. There is quite the oversupply of "educated" (papered)
individuals. The value of a secondary education has been diminished because of
this oversupply. We've seen it in the tech scene: A good bit of companies
equally value experience vs education (and some value experience more!) - and
why not, the goal is to leverage labor for profit - in the case of tech; to
create more utility.

Unfortunately, we've done a disservice to ourselves: Instead of teaching
others how to think, we've taught them what to think. Most graduates coming
out of the ivory tower of education lack the ability to bootstrap their own
intellectual development. Historically, universities served a purpose: the
higher-level of information and application could only be consumed through
them (gatekeepers). We are in a new era of information. Information is
abundant. We'd be better off as a society if we focused on the "how to think"
than the "what to think".

------
undefined3840
The problem is compounded by the fact that students do not get to choose who
their loan servicer is and thus a few servicers like Navient have a government
approved monopoly on that business. Can look up many reports on their
incompetence and misleading information that funnels students into repayment
plans that maximize their own revenue.

~~~
vonmoltke
As far as I know Navient _is_ the servicer for Federal loans. Who else is
there since the change to DOE-only government loans?

~~~
cableshaft
Mine ended up getting shuffled around until it became Mohela. Once there it's
stayed there.

Wikipedia: "The Higher Education Loan Authority of the State of Missouri, aka
the Missouri Higher Education Loan Authority or MOHELA, is one of the largest
holders and servicers of student loans nationwide."

------
Shivetya
so in other words, when the government steps in and interferes with the loan
market it just balloons costs and lacks the oversight it should have; because
it was a quasi government agency which caused a big portion of the mess in the
mortgage industry one with many connections to members of Congress

~~~
LockAndLol
I cannot gather whether you are pro or contra regulation from this comment
since regulation is stepping in and interfering...

------
ladyattis
I won't lie, I have six figure student loan debt. It was all my own stupid
making but what I think it's worrying is how fast people are willing to defend
the loan system as is for education as employers continue to inflate
requirements and certification processes when often such work can be learned
on the job (programming IMO should be a trade school equivalent job and not
something you go to university for unless it's for something related to pure
science or an engineering discipline). So I expect the whole loan crisis to
come to a head come the next recession. For me, I'm not so sure I'll be able
to climb out of the hole I made for myself but I just wish politicians at
minimum would prevent others from digging their own for the future.

~~~
Nursie
> (programming IMO should be a trade school equivalent job and not something
> you go to university for unless it's for something related to pure science
> or an engineering discipline).

I learned way more in my degree about software principles and about theory
than I could in years on the job. Computer Science degrees may not prepare
people directly for software development in the workplace, but they do lead
you to a greater understanding of what's around and underneath you that you're
just not going to get commercially coding.

I'm not saying everyone _has_ to do it, but I am going to say it helped me
tremendously to be a better creator of software.

(--edit-- I'm also going to say that I was part of the last year of students
that didn't have to pay for their degree's at all in England, I appreciate the
value proposition is different when you have to take on debt to do the
course.)

------
rotrux
People have been talking about this for at least a decade & I wonder when the
shoe will actually drop.

~~~
WizardAustralis
I forgot who said it but "bubbles grow far bigger than is rationally thought
possible, and fall far faster than anyone expects".

These bubble can go on for decades but once it bursts, the bottom of the
bucket drops out and all the water goes with it.

~~~
h5er4ah45eaq
Probably should be that the pop fast, not fall fast. In real life bubbles fall
quite slowly.

------
notadoc
Lifetimes of debt service is a lenders dream

------
golergka
As a non-american, what makes me curious is why do black students borrow twice
as much money as other groups. Do they choose more expensive degrees?

~~~
pgcj_poster
Black Americans are poorer than most other groups, and I suspect that they're
less likely to get parental support paying for college.

~~~
zrail
Let’s be very clear: Black Americans are poorer _because_ of racist policies
that kept them out of the huge post-WWII governmental benefit programs. Things
like the GI bill and veteran home loans, and homeownership in general were
white-only for many years, allowing that group to build generational wealth
that continues to this day.

~~~
auiya
Source:
[https://en.wikipedia.org/wiki/Redlining](https://en.wikipedia.org/wiki/Redlining)

------
anfilt
Biggest problem it's almost impossible to discharge student loans in
bankruptcy.

~~~
iamkroot
If you could discharge student loans via bankruptcy nobody would get a loan.
No financial institution is going to hand out 5 figure loans to a teenager
with no credit history, no job, and no marketable skills.

~~~
triceratops
And college might start costing something reasonable.

------
niceworkbuddy
Yet is not like. When you default your mortgage, bank can get you rid of
property. However what you have learned, you still have it in your head (at
least in some way).

------
duelingjello
$1,654,255,000,000 USD and counting ($38k/student) [0]

There are US citizens with over a million dollars in debt. [1]

This is crazy. Other countries invest in people, sometimes including non-
citizens.

0\. [https://usdebtclock.org](https://usdebtclock.org)

1\. [https://www.marketwatch.com/story/he-ran-up-a-million-
dollar...](https://www.marketwatch.com/story/he-ran-up-a-million-dollars-in-
student-loan-debt-en-route-to-becoming-an-orthodontist-2018-05-25)

------
xyst
glad I realized that I needed to refinance my variable interest rate loans
into a single fixed loan at ~2% APR after graduating.

I think I would have been screwed in this current climate.

IIRC, I received those loans at an advertised “teaser” rate of 1-2% APR, but
since they were variable the percentage tended to increase over the years -
5-6% APR before refinancing.

------
BlueTemplar
I've seen people saying this for years - hopefully it's not the first time
that NPR reports on this?

------
WomanCanCode
Student loans program should continue for highly sought out program like
medical, dentistry, computer science and others. But there are degree like
physics, history and general education that doesn't have great employability.
The university here will take all the money they can because at the end of the
day this is just business for them. Students sometimes will take the easiest
course because they can

------
tengbretson
What would happen if we forced universities cosign the loans that their
students take on?

------
aasasd
> _Student Loans a Lot_

Well, bad for student. ¯\\_(ツ)_/¯

I keep being baffled by continued use of the newspaper title style on the
English-language web—but at least it's a steady source of entertainment.

~~~
pilsetnieks
Well, for one, it's a news organization so newspaper style is somewhat
acceptable for them, and second, as for your particular example, while it does
read a bit like a garden path sentence, it's a completely valid compound noun.

------
iso947
In the US, school is free from Kindergarten to grade 12. Why isn’t college
free?

~~~
grecy
Because the US is a for-profit society, not one focused on improving the lives
of citizens. Companies are making billions on health insurance, education,
etc.

It won't change because they want to hold onto their profits.

~~~
iso947
In that case why is school free?

~~~
grecy
Elementary and secondary are free to keep people going to work (i.e. it's
child minding), and to keep children out of the workforce.

------
auiya
I think the student lending fiasco will be far worse than the sub-prime
lending crisis. Although the amount of liquid assets and equity in the sub-
prime lending debacle was an order of magnitude larger than the student loan
crisis, the outcome for the student loan crisis isn't quite so clear yet.
Allow me to paint a scenario...

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.

~~~
frockington1
Sounds like real estate investment in high density and highly educated cities
would be optimal here given your assessment. Any other opportunities you can
see? Personally I think this may increase class mobility. A lot of middle
class ____ Studies majors will be shifted down and creating
opportunities/openings for those who didn't go to college and instead have
trade skills and work experience

~~~
auiya
> Sounds like real estate investment in high density and highly educated
> cities would be optimal here given your assessment

There are stock market ETFs which do precisely this.

