Misplaced incentives all over the place. This one is going to be messy. But as many people have pointed out, much more slow moving than the previous financial bubble.
(I wish I was joking...)
The majority of fault lies in the previous generation of parents, who both failed to vote out politicians supporting these policies and who pushed their kids into enslaving parts of their lives to lenders.
EDIT: nevermind, apparently both you and drcode are discussing hypotheticals only.
This way students would get a free higher education... at least those that make at least some actual studying.
As someone who really hasn't thought about it very much, I'd love for someone to expand on this. What's the expected fallout? In the housing bubble, many people lost the places where they lived. But it's not like someone can "take back" your education if you default on the loan, so what happens instead?
The fiction of student loans is tricky because under Bush they changed bankruptcy rules to exclude student debt. But fundamentally when banks are forced to write down bad student debt, their rosy asset picture becomes non-rosy. When that happens they are required by regulators to not lend. And this is ugly for the whole economy.
In 2008 we resolved the problem by having the US government find ways to lend tremendous amounts of money on very favorable terms, and then the Fed picked this up with a similar policy that they call quantitative easing. This creates lots of money in financial markets so that things like banks can continue to operate. The bigger long-term problem is how we'll ever exit the policy.
To give an idea how sensitive this situation is, a while ago Bernanke announced that if things continued to improve faster than expected, in a year the Fed would evaluate whether to exit QE 2 faster than originally planned. You can't come up with a milder statement that the policy might end. The markets went crazy. A few days later, Bernanke came out and said we won't be doing that after all, then markets calmed down.
There is no question, a student loan debt crisis will be responded to with more QE. The problem of exiting the mess will become bigger. Historically countries have exited this type of policy only after the crisis of a currency collapse. But so far the market players seem to be betting that they will get out of the USA before the other guy when the crisis hits, and in the meantime the USA looks safer than China and Europe.
However the financial economy is always a mess. And they are always finding another way to kick the can down the road. That will certainly happen again. And again. And again. Until it doesn't. Every time the doomsayers say, "We don't see how we can kick the can down the road again!" But we do. The dot com bust was resolved with easy interest policies that resulted in a housing boom that resulted in the financial crisis. That was resolved with QE.
Take your best guess as to whether we'll kick this can down the road as well...
Just ask the people who have been long-term unemployed since 2008 about that.
So instead of losing your home, you may never get it in the first place.
The consequences of defaulting on a student loan are also quite severe.
I am 25, and since my first serious job (I was 23) I've been in the government category for the most rich as possible in earning amount (the category is everyone in the top 5% of income... granted, there is still a GREAAAAT gap between the top and low of that... I reached the top 5% with 20k USD/year)
I don't own a vehicle (not even a bicycle), much less a living place.
I think if I sum all my possessions (literally, including my clothes, glasses, phone... without depreciation) and my debts, I am still negative.
According to my calculations, I will be able to buy my first apartment when I am about 35 years old, unless I move back with my parents and stop paying rent. Also I won't bother in buying a vehicle, unless it become really, really necessary (and then, I will buy a chinese QQ or J2)
When I think about that, it is really, really, really depressing and ridiculous.
- All these young people who can't afford homes, cars or kids will cause the economy to not grow as fast as it otherwise would.
- And if the economy is slow, fewer jobs will be created, keeping these young people poor even longer.
Of course, not everyone has parents that they can move in with, and those who don't have that safety net will suffer the most.
http://www.rollingstone.com/politics/news/ripping-off-young-...
Short version: The government makes money off student loans, and there is no defaulting on them (unless you die of course). There are no incentives to keep tuition costs in check because the lenders (government) are happy to put more money into the asset class. We're getting to the point where the price of education can't be made up with an eventual increased salary. The author considers this to be an unfair tax on the lower middle class and an eventual drain on the economy.
If profitable, that would imply that commenters calling loans a subsidy are simply incorrect.
If the banks did this and the student/graduate had to default, the bank would have to take a loss. The government isn't allowing default on the loans they themselves give the students, so they'll make sure they get their money back.