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.
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 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.
Yes, but the question is if they'll care. Many people believe it morally important to enforce the unenforceable.
The economic effects are too large for them to ignore.
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.
So yes I expect there are already student credit default swaps somewhere.
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.
Nobody forced them to take out loans.
There are lots of options which don't involve crushing debt.
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".
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.
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.
Long gone are the days in which one could put themselves through school with a part time job.
It's been 15 years, and I haven't seen any new colleges or universities formed.
What happened?
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.
...and their endowments in $10-40 billion range:
http://www.ibtimes.com/ivy-league-endowments-2015-princeton-...
https://www.washingtonpost.com/news/on-leadership/wp/2015/09...
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?
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".
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.
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.
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.
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.
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...
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.
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.
You pay 10% of what you make over 150% of the federal poverty level.
An interesting note: http://www.npr.org/sections/money/2015/09/05/437628996/episo...
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.
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.
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.
[1] http://www.consumerfinance.gov/newsroom/student-debt-swells-...
[2] https://studentaid.ed.gov/sa/about/data-center/student/portf...
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.
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.
If you have a job, you're definitely not as impacted WRT your student loans as someone without a job.