The Student Loan Bubble

As many of you know, part of the Patient Protection and Affordable Care Act (i.e. Obamacare) nationalized the Student Loan industry, The Federal Government is now the sole issuer of Student loans!

Well except for “a new program for lenders who were chartered before July 1, 2009, and are owned by a state under the control of a board including the governor and offered guaranteed loans prior to June 30, 2010.” Which strangely only applied to one bank, the Bank of North Dakota which was all but in name a payoff to North Dakota Democrat Kurt Conrad who was the chairman of the Senate Budget Committee.

Since that time Student Loans top $1 TRILLION DOLLARS! Thats right the “T” word! And its growing at 20% a year.  Oddly with uncle Barry to the rescue, tuition rates have gone up 25% in three years and the default rate is at a record 13.4%  But i thought the government was here to help?

The average Student comes out of college with $29,000 in debt and their is speculation as to a bailout.

New Federal regulations have trapped students forever to this debt, you cannot escape it with bankruptcy like you can a business or mortgage debt, it follows you forever because It is NOW FEDERAL! Makes you wonder at these young kids out there complaining about student loan debt with an Obama shirt on right?

I mean the guy and the government is responsible for these things

• A college degree used to mean a student would make $1 Million more in lifetime income, now its $300,000, a 2/3rd decrease
• 25% increase in cost
• Higher Default rates
• Debt follows you forever, you cant walk away

WHAT IS THE PLAN?

However even with the higher rates and the inability to walk away, the banks that currently hold this debt cannot collect, SO whats the response?

I dont agree with bailouts, for any circumstance, you chose to make risky investments, you pay the price, you go to college, you pay the bill.

However the government isnt going to “forgive the debt” as many clueless students out there think they voted for, one of the things being tossed around is to give the banks another bailout!

Thats right the government gets a twofer, pay off the paymasters and put the debt on Federal Books, so now even past students in default will be in hock to the government! Currently $74 Billion is in default, and thats only going to rise.

Another path is “The Student Loan Forgiveness Act of 2012″, its slightly different is to “Forgive” The debt, by tacking on a Trillion to the Federal Debt, however this is only prolonging the pain for this generation.

So these students who are entering the workforce now or soon, probably think this is a “great idea” however with Federal Debt interest payments rising every year and projected to be $800 Billion by 2020 (This is of course not taking into account another Trillion added to “forgive”).  $800 Billion may not sound like alot nowadays with Trillions thrown around alot, but this is nearly quadruple the current payments we are making now and considering we spent $718 Billion in Defense this year, its a major, major number.

THE DEBT BUBBLE

If I havent made it clear to you before let me reiterate this now.

Interest is fickle thing, in retirement the curve can be a good thing.  If you have ever talked to a financial planner and been shown a projected outcome of your retirement if you pay X every month, when you reach that age you will probably know what im talking about.  If they show you a chart you will see small increase over the years from the time you start, even 10 years out it really isnt getting that much bigger, its usually within the last few years before retirement that you see the biggest increase, it goes slightly up, a little more, ok its going up, BOOM and it skyrockets!

This is just a random graph i pulled of the net, but this is what im talking about.

It works the same way when you continue to compound debt, that is continue to add more and more and more.

Here is chart showing our payments from 1936-2012

Here is another showing our projected interest payments in relation to projected GDP

To help explain this easier, lets say that the US was worth (GDP) this year, and out debt was 20% or the GDP

that would mean $20 of the $100 goes towards interest payments, and GDP IS NOT TAXES, thats EVERYTHING THE US PRODUCES THAT YEAR!

Another way to look at it is this, in 2011 the U.S. government took in 2.5 Trillion and spent 3.8, that means in 7 short years our interest on the debt will be 1/3 of EVERYTHING the government took in last year.

This is unsustainable, it really is and why i am predicting severe financial difficulty within the next 1-3 years for our country.

PREDICTIONS

My predictions on the student loan bubble are these.

The economy will continue its slide down, the mix of layoffs coming ahead of the obamacare mandate, as well as continued stagnant growth will result in less hiring and higher unemployment.  With fewer jobs available, many students will be forced to not pay off their loans.  Ben and the Fed will step in with the U.S. Treasury to Bail out the Banks, this will be around the 150-200 Billion in default rate.  This will coincide with legislation like the “Student Loan Forgiveness Act”, and effectively nationalize the last of the remaining debt held in private hands.  The current legislation has tied the hands of the banks as well as permanently welded student loan debts to the individual who has them, effectively putting into place this very situation.  I dont want to sound conspiratorial, but its like that scene in “Lock Stock and Two Smoking Barrels” where the guy running the poker game makes a big bet, extends “credit” towards him at the same time a camera is watching the cards in his hand.

This is in my view a way to keep a whole generation in debt, slaves, to the government for their lifetime.  This debt, that can never be gotten rid of, was incurred as a result (at least the larger amounts) due to government meddling in the loan business.  This lifelong debt will be a generational carrot to be dangled in front of voters every election as a “well help you” mantra that they will continue to repeat, and if they resist, they will feel the full force of this debt affect their lives.