Andrew Hacker and Claudia Dreifus warn about the increasing student debt burden, which, they remind us, cannot be discharged in bankruptcy.
If you want to get a name as an economic seer, try this one. The next subprime crisis will come from defaults on student debts, starting with for-profit colleges and rising to the Ivy League. The parallels with housing are striking. In both, the written warnings aren't understood, especially on penalties and interest rates. And in both, it's assumed that what's being bought will rise in value, in one case the real estate, in the other the salaries which will accrue with a degree. One bubble has burst; the second is already losing air.
Still, there's a difference. With mortgage defaults, banks seize and resell the home. But if a degree can't be sold, that doesn't deter the banks. They essentially wrote the student loan law, in which the fine-print says they aren't "dischargable." So even if you file for bankruptcy, the payments continue due. Hence these stern word from Barmak Nassirian of the American Association of College Registrars and Admissions Officers. "You will be hounded for life," he warns. "They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment." He adds that any professional license can be revoked and Social Security checks docked when you retire. We can't think of any other statute with such sadistic provisions.
Hacker and Dreifus rightly see the student loan bubble bursting, and for good reason. These loans back securities (SLABS---student loan asset backed securities) which are percolating through the financial system much as RMBS (residential mortgage backed securities) did, and just as inability to pay mortgages popped the RMBS bubble, increasing numbers of graduates and dropouts who default is going to pop the SLABS bubble. And sadly, young and not so young graduates and dropouts will be unable to pay back their loans because i) they are unemployed or ii) they are employed at low wage work or iii) they owe more than they can pay--- the penalities, interest and fees on top of the loan amount make the monthly payment impossible. (note that the 'or' is inclusive).
Worse, the burden of student loans will turn younger americans into a permanent debtor class. Making debt peons of younger people is not a blueprint for political stability or economic well being.
(cross posted at Possible Experience)