Shorting Student Loans: The Next Major Credit Bubble

It's interesting to watch some of the terms bandied about in headline news. For example, the LA Times headline reads S&P says student loan debt could be next financial bubble. Next? Could Be?

President Barack Obama called for linking financial aid to college affordability when he addressed Congress last month, but even as costs keep rising, some experts say not to expect crucial changes this year.   Reforming how financial aid is distributed – with incentives to keep tuition down – probably won’t come until after Congress tackles equally thorny changes in primary and secondary school education, known as K-12 in the U.S.  

The growing debacle that is the US student loan bubble - nearly the same size and severity as the Subprime crisis at its peak- has been painfully dissected on these pages in the past, so at this point the only thing remaining is to keep track of the bubble growing exponentially in real time as it hits all time records, and eventually pops.

This guest post is contributed by Mark Paul and Anastasia Wilson. Both are members of the class of 2011 at the University of Massachusetts-Amherst. For-profit colleges are expanding enrollments at a rapid pace, but it is questionable whether these revenue-seeking universities give adequate consideration to students’ welfare, retention/graduation rates, and overall economic well-being alongside their bottom line profits.

Rohit Chopra, Associate Director of the CFPB, Student Loan Ombudsman, and Question-Answerer.

How much does the federal government subsidize the cost of college in the United States? That's the subject of today's chart, where we've taken historical data from the White House's proposed budget for Fiscal Year 2011 and plotted it over time. The chart below shows both nominal and inflation-adjusted figures for all federal outlays for higher education since 1962, with projected values through 2014.

The federal government plans to write off $173 million in unpaid student loans in the coming fiscal year, which will bring its three-year write-off total to $716 million. Taxpayers were on the hook for $312 million in Canada Student Loan write-offs in the 2011-12 fiscal year and $231 million in the current fiscal year (2102-13), although the loans in question span many years.

“So, my student loan payments are more than my monthly rent?” exclaimed my sister-in-law, Kari. “More than a mortgage payment, to be honest,” I replied. Kari is finishing up her junior year of college in May and was curious about what life after college would like like.