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Student loan debt surpassed credit card and auto loan debt in the US last year. Many college grads graduate with large sums of debt and can't find relevant jobs. Since student loan debt isn't forgivable, it'll be interesting to see the effect of this over the next decade. I have a hunch that the next big market crash will be caused by student loan debt.



I agree that student loan debt seems like an asset bubble -- in that the price of an education greatly exceeds the valuation justified by the fundamentals.

But I can't think of a way that the bubble could actually pop. Or what it would look like if it did.

Unlike housing, you can't walk away from your education; student loans are designed to prevent debtors from ever escaping their obligations. They're also guaranteed by the federal government, which has seemingly infinite resources.

Educational institutions themselves are also either private, or are state-run, both of which would shield the impacts of a collapse from the average citizen. The average citizen isn't invested in education like they were in public tech companies or housing. It's also impossible to short Harvard or the UC system.

I actually think this is worse in some ways. Bubble pops are scary, but the bandaid comes off quickly. Instead I fear educational indebtedness will just be a silent vampire on our economy for decades to come.


> But I can't think of a way that the bubble could actually pop. Or what it would look like if it did.

It would look like a social movement. It would look like tens of millions of young people realizing that they have fallen under the yoke of life-long indentured servitude to the older generation, and either 1) getting organized enough to get the law changed or, 2) saying "fuck it, I've got nothing left to lose" and rioting in the streets.


The government will eventually realize that the defaulted loans, together with penalties and fees, can never be paid back - no different than the typical house flippers of 2008 who leveraged themselves to the hilt with multiple properties.

The banks and funds that own these defaulted loans will threaten to take down the whole system, including Main Street's pension and IRA savings, unless they're bailed out. The Fed's printing machine will come to the rescue.

Loans won't be 'forgiven' per se, but just like many defaulted mortgages, the debt will simply not be enforced for those that have the balls to simply stop paying, though life will be a PITA for a while as their credit takes a huge hit for the next decade.

Those that do continue to pay will feel like suckers. The rest of us will curse the lazy bums who got off without paying. Wall Street execs will be handsomely rewarded for having saved their firms from catastrophe, while politicians will preach of reform, only to pass watered-down laws to appear proactive.

Due to the money printing, the average American will see his quality of life decrease relative to the rest of the world; meanwhile, Wall Street will begin moving money into the next hot idea that can be leveraged with no risk to themselves.


> The government will eventually realize that the defaulted loans, together with penalties and fees, can never be paid back - no different than the typical house flippers of 2008 who leveraged themselves to the hilt with multiple properties.

Yes, but the question is if they'll care. Many people believe it morally important to enforce the unenforceable.


For federal student loans, there isn't a life of indentured servitude. There are income based repayment plans that with fairly low costs per month. A single guy working at starbucks making 30k per year would only pay about $100 per month even with a 200k loan (if he had a wife and kid, he'd pay nothing). Then after 20 years the rest is forgiven.


That system exemplifies what seems to be a growing issue these days–people with too little income get programs like that to help them squeeze by, people making lots of money pay them back without a problem, and the people in between kind of float along paying enough monthly that they put off buying a house or having kids or starting a business because they have 10+ years of loan payments. The long term outcome of this doesn't seen like a healthy society to me.


In year 20 he pays income tax on the forgiven amount. He'd better be saving up for that.


That's never going to happen. Too many people are affected for congress not to act before the tax bill comes due.

The economic effects are too large for them to ignore.


Much like the economic effects of not passing a budget, or the economic effects of a temporary government shutdown for petty reasons?


Most people don't really care about government shutdowns because it doesn't directly cost most people much money. And, even then you'll notice the government never stays shutdown.

If government shutdowns meant a huge chunk of the voting population (across both parties) was suddenly going to owe thousands of dollars in extra taxes, you can bet they'd never happen.


A lot of the loans that people hold are not federal loans.


There's about $1.2 trillion in outstanding student loans. $1 trillion of that is in federal student loans.


Makes me wonder if there's already some form of credit default swapping going on with student loans that we won't uncover until after the bubble pops.


I recall a story of a company that was analysing student loans, finding people most likely to pay the loan off and buying that debt.

So yes I expect there are already student credit default swaps somewhere.


We would do well to mobilize people to either #1 or #2, since both would create change.

The trick is convincing people that they're getting screwed over by something that can be changed. Most just accept it as a way of life.


> It would look like tens of millions of young people realizing that they have fallen under the yoke of life-long indentured servitude to the older generation

Nobody forced them to take out loans.

There are lots of options which don't involve crushing debt.


When I was graduating high school student loan debt was something I was encouraged to take on, despite my on uneasiness about doing so. My teachers, my family, everyone whose opinion I was supposed to respect told me that student loan debt was normal and even valuable (to build credit).

So while no, I wasn't FORCED to take out loans, the most trustworthy people in my life taught me that loans were okay, and never presented me with another option. Luckily this paradigm is showing signs of a shift, but for a lot people it's still considered "normal".


>Nobody forced them to take out loans.

No, but many people feel misled about the post-graduation prospects or are unhappy with their life options and feel trapped in a career they hate and can't take a break from or change due to debt.


Could you elaborate?


On which part? That there aren't roving bandits forcing people to take on huge loans? Or that there are other options?

In terms of other options, there is (a) community college—very cheap, (b) state school—much cheaper usually, especially if you live at home, (c) attending a slightly less prestigious college when they offer a substantial merit scholarship.


Like what?

Long gone are the days in which one could put themselves through school with a part time job.


Back around 2000, when I saw education costs rising (and was a big believer in market forces), I figured more educators would enter the market, and things would stabilize.

It's been 15 years, and I haven't seen any new colleges or universities formed.

What happened?


The market did accommodate it. Lots of for-profit schools (Wyotech, Heald, etc.) popped up and made a killing largely by helping students fill out loan paperwork for the maximum allowable amount while providing a dubious credential without meeting the standards of reputable accreditation boards. The credits were not transferrable in most cases, and many of the schools have been shuttered for charges bordering on fraud. (A friend from HS owes more on loans for 18 months at Heald than I owed from a 4-year degree at a state school.)


Udemy etc and the tutorial market are booming.

Universities in countries with inflated fees and tuition loans are about to fall off a cliff. I'll be surprised if they're still around a generation from now.

The Ivy League will survive because of social and political momentum. But colleges outside the prestige circuit are going to have real problems getting students for high-cost low-return education.


>The Ivy League will survive because of social and political momentum.

...and their endowments in $10-40 billion range:

http://www.ibtimes.com/ivy-league-endowments-2015-princeton-...


Credentialism in industry will still be a problem. But hopefully employers are starting to combat that:

https://www.washingtonpost.com/news/on-leadership/wp/2015/09...


"Udemy etc and the tutorial market are booming."

Are they? Are significant amounts of people actually foregoing college to learn from them instead? And, more importantly, are they getting hired in good jobs in the field they're studying in?


> and was a big believer in market forces

A non-market force happened. The government started guaranteeing student loans. Although honestly, even without that, I don't think people are good enough in estimating the extra payoff of education they haven't received yet over their 30+ years long career in the future, to properly evaluate the market value of college education; instead, they were just believing the old mantra "college is worth it".


Wait - wouldn't that cause more demand and thus more opportunity on the supply side?


Exactly - more demand, and thus a rising price - as has happened in recent years.


Since 1980, the number of colleges has gone from roughly 2000 to roughly 3000. That doesn't account for increases in class size.

The demand is still very strong. The millennial generation was told, go to college or you'll have to flip burgers your whole life.

One huge problem is college demand is fairly inelastic. Another is that colleges are mostly non-profit institutions who aren't out for institutional profits. Instead they compete for prestige. If they spend a bunch of money on useless shit, USNEWs will rank them higher.

Students and parents aren't urged to consider price. In fact they are encouraged to ignore price. Just get in first! then worry about "financial aid." Which is mostly just loans at this point.


Hopefully the bubble popping looks like University of Phoenix and its for-profit brethren going out of business. The looming student loan crisis has been reported for a while, but what's more recently been reported is just how large a percentage of it is these for-profit schools.

We hear scary numbers and naturally associate them with expensive private school educations from the ivy schools or similar institutions. But there's really no crisis there...people graduating from an ivy league school will almost certainly pay off their loans, large as they might be. The bulk of the defaults will come from people who've gotten largely-meaningless degrees from those for-profit schools. It's sad, but job screening skills are so bad in most industries that they basically just use the college admission screening process as a proxy. And the fact that basically anyone can get into the University of Phoenix means that there's almost no value placed on having graduated from there.


> But I can't think of a way that the bubble could actually pop. Or what it would look like if it did.

It would look a lot like the retrenchment of the private for-profit college industry when private lending outside of government guaranteed programs collapsed with the 2008-2009 financial collapse, only hitting all of higher education, and the real-estate markets buoyed by universities, and the communities and industries supporting higher-education generally.

And it could happen with the stroke of a pen -- the federal government just cancels direct and subsidized loan programs.


>They're also guaranteed by the federal government, which has seemingly infinite resources.

IMO That resource is GDP. If American's can't find meaningful work that has financial value not just domestically, but internationally, we'll see how much of that resource is left after a few decades. Or more accurately, we'll see a VERY tiny percentage of Americans with vast wealth and the majority struggling for subsistence because the government has essentially been deactivated due to lack of funds.


If America runs out of money, they will just print more. If their creditors call out their loans, America is very happy to pay them off: in US dollars.


At some point China will stop believing in the value of US bonds.


These are both the same people but maybe the bubble bursting sounds like this :

A dangerous revolt: People are refusing to pay back student loans [1]

America’s student loan boycott: How 15 students took on the government — and just may win [2]

[1] http://www.washingtonpost.com/news/get-there/wp/2015/02/25/a...

[2] http://www.salon.com/2015/03/03/student_loan_fraud_factory_h...


Student loan debt isn't dischargeable in bankruptcy, but their are income based repayment plans.

You can pay back either 10% of your discretionary income, for 20 years and then the remaining balanced is forgiven (if a balance remains).

Discretionary income is defined as the difference between your income and 150% of the federal poverty level. If you have 200k in student loans, but only make 30k a year because you can't find a job better than starbucks, you'll only pay about $100 a month. If you have a spouse and a kid, you'll pay nothing.

*note these number depend on when you borrowed. Older loans have to pay 15% for 25 years instead of 10% for 20 years.


> You can pay back either 10% of your discretionary income, for 20 years and then the remaining balanced is forgiven (if a balance remains).

For federal subsidized loans, forgiveness of loans means that it comes out of taxpayer money.

For people talking about student loans as a bubble and wondering when it will pop and what that will look like, this is the most likely mechanism for that to happen.

This is a really serious principal-agent problem, because schools have only indirect incentives (at best) to make sure that their graduates are employed at rates which allow them to pay back those loans in full. On the other hand, the federal government is essentially incapable of denying people these loans as long as they meet the financial criteria.

In that light, it's not hard to see how tuitions have spiked, and student debt along with it. Schools are essentially incentivized to take out massive loans against their students, which amounts to another source of public funding for universities.


There's only about a trillion dollars in Federal student loans. It's nothing compared to the real estate bubble.


Yet if you are below the poverty level (unemployed) those monthly minimums can be overwhelming.


No, if you are below the poverty level the monthly minimum is $0.

You pay 10% of what you make over 150% of the federal poverty level.


I really need to look into this then, some months I make $0 and last year my total income was below the income tax threshold, yet I'm still paying some $50 minimum monthly on my staffords.


Not to discount the severity of the student loan problem, but the market is really not large enough to cause the next big crash. For some perspective, pre-crisis mortgage debt was almost two-thirds of GDP whereas student loans are still a much smaller portion. Mortgages on hugely inflated home prices also sucked up a huge portion of incomes in 2007. Add in the systemic infection of credit default swaps and junk mortgage-backed securities on Wall Street and you had the Crash. Hopefully we'll wisen up well before student loans get to that point.


Student debt has been thought to be the next crash, but I'm not sure how unless the laws change. It's not dischargable in bankruptcy so it's not like you can walk away.


It's the next crash through a different vector - if the loans aren't dischargable, a large portion of the the economic activity that young people normally generate as they grow along their career path is now siphoned off to repaying loans. That's a low value use of the money to the rest of the economy. Maybe it doesn't end in a dramatic crash but an economic stagnation for as long as inflation is low (inflation being a side channel way of devaluing those loans...).

An interesting note: http://www.npr.org/sections/money/2015/09/05/437628996/episo...


We can already see this in the US economy. Millenials are largely putting off traditional milestones like marriage, car ownership, having children, saving for retirement (or saving at all) and home ownership for lack of capital.

These are pretty major drivers of consumption, but think about the second order effects: fewer home pools being built, fewer new auto parts needed, fewer childrens clothes being bought, fewer weddings to need DJs, etc. There's quite a bit of fallout there, and it's going to be hard to pin John and Son's pool construction company going tits up on student loan debt slowing the economy, even if it's the case.


Student loan debt won't create a crash, it has just been an enormous brake on the US economy for almost a decade now and we've grown so used to its effects that we don't really notice it anymore.

Imagine how many young people would start a company or take a risky-but-educational job except that they need the liquidity and stability to make a student loan payment every month? You could get living expenses close to zero by living with your parents for a while, but student loan payments require you to have some cash coming from somewhere each month.


>You could get living expenses close to zero by living with your parents for a while, but student loan payments require you to have some cash coming from somewhere each month.

Not with federal student loans. They have income based repayment plans. If you have no income, you don't pay. After 20 years the debt is forgiven.


Unfortunately the cap on maximum borrowing with federal student loans is quite low compared to the total cost of many colleges, so there's lots of private loans that come due six months after graduation and don't really care what your income level is -- they just want to be paid.


That's true. But of the total student loan debt of $1.2 trillion, and $1 trillion is federal student loan debt. Private loans are a comparatively small problem.


WOW, thank you for posting this. That is astounding and I had no idea it was that magnitude when I wrote my previous post. If anyone wants a source, the $1 trillion number is from the federal Consumer Financial Protection Bureau[1] and CFPB has even made available a detailed breakdown of the federal government's student loan portfolios[2]

[1] http://www.consumerfinance.gov/newsroom/student-debt-swells-...

[2] https://studentaid.ed.gov/sa/about/data-center/student/portf...


For federal loans (private loans are hard to get these days) the law is actually very reasonable.

You pay 10% of your (Income - 150% of poverty level). That's less than 10% of your income. And nearly zero for a lot of people. You pay it for 20 years and they wipe out the debt.

One huge problem is that people don't sign up for this system or instead just default. It's shocking that so many college graduates are sticking their head in the sand. It's a simple process. I've done it twice.


Will living in permanent default become the new bankruptcy? Also what happens to your US student debt if you move abroad and stop paying it?


Eventually, creditors might write it off, but the borrower would be liable if they ever return to the US.

Also, given how annoying it is for international banks to work with US expats, I can't imagine they would look past that kind of dent in credit history.


Depending on the loan, student loan debt can be forgivable: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancell...


If you 1) have a job at a 2) qualifying employer (non-profit or government).

If you have a job, you're definitely not as impacted WRT your student loans as someone without a job.


s/big market crash/massive dollar devaluation




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