The $1 Trillion Student Loan Market Begins To Implode


The $1 trillion student loan market begins to implode – Department of Education shows two-year default rates at for-profit colleges up to 15 percent.  Student loan debt increasing at a rate of $170,000 per minute.

We seem to have entered an era of perpetual and unshakeable financial bubbles and the next ripe bubble to burst is in the student loan market.  Student loan debt has become the fastest growing debt sector throughout the economic recession.  Growth at for-profit colleges has been incredible and tactics used at these institutions reflects patterns seen with the subprime mortgage operators.  They target low income markets and exploit government backed loans and pump them through local area lenders.  It is a bubble of mammoth proportions and it is no surprise that data released by the Department of Education only a few days ago reflects a default pattern reminiscent of the subprime crisis.  Default rates on student loans at for-profit institutions are absolutely abysmal.  There is no question now that the student loan bubble is now the next market to pop.  What will be the consequences of the $1 trillion student loan market contracting?


For-profit student loans the new subprime

subprime debt college debt

Source:  RortyBomb

“(Department of Education) The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools.”

This rate is horrifying.  The ways these are measured are reflected by two-year default cohorts so you have 15 percent of the entire group defaulting within two-years!  The real default rate is much worse if we tracked these out for the life of the loan.  In other words, you have many going to for-profit paper mills and coming out with very little job prospects but with the added burden of massive student loan debt.  Clearly the student did not benefit but the profits at these institutions are enormous.  The government backing is the only way these lenders and schools even survive.  If a bank had to lend their own precious money you think they would give someone $40,000 or even $100,000 in student loans to pursue a degree at an unranked paper mill?  Reminds you of people buying tiny condos in Florida for $500,000 with no verifiable income.

The above chart is startling.  Take a look at the yellow and red lines.  That rise is simply the increasing default rates that we are seeing and we still have yet to see 2010 data which is likely to be even worse.  And keep in mind student loans are still expanding in this crisis.  While every other sector of debt is contracting this is the only area growing.  What is worse is that the earnings for recent college graduates doesn’t reflect the higher costs of college:


Source:  BusinessWeek

Take an open look at the above chart and align it with these stats:

Since 2000, in real terms college costs are now up by 23%

Since 2000, in real terms real pay for college graduates is down by 11%

Read the rest at My Budget 360