Unlike the housing bubble, student loan debt won’t collapse. And there are two big reasons why…
Up first, there’s nothing backing the student loans (outside of future expected earnings). Lenders can’t take your degree or education back from you. With home loans, on the other hand, banks can foreclose the properties and then resell them to recoup most of their investment. That’s one big difference when comparing the two bubbles.
Now, the second reason, people drowning in student loan debt can’t use bankruptcy as easily to wipe it out. I’ve rock climbed with an attorney who specializes in this area of law. And to say the least, I’ve gained some unique insight, which I’ve paired with my understanding of financial markets.
It’s a myth that you can’t reduce or eliminate student loans with bankruptcy. The truth is that it’s just difficult to do…
In 1998, Congress removed student debt dischargeablility and only gave one exception… if a debtor could show that repaying the loans would create an undue hardship. Then in 2005, Congress extended that to private student loans.
Proving undue hardship to wipe out student debt is a challenging process. So, most people don’t even try. They’re just happy to reduce credit card and other debts with bankruptcy.
With this insight, you now know why the student loan bubble won’t collapse. Although, what’s really caused this problem? Total student loans have climbed from $480 billion in 2006 to over $1.6 trillion in 2020. That’s over a 230% increase!
And as you can see, the 2008/2009 recession didn’t even slow it down…
So, let’s now pull back the curtain and find out how we got into this mess. Many people overlook these next two core problems…
Student Loan Debt Crisis Breakdown
So, what’s got us into the student loan crisis? If you’ve watched my recent video on unemployment, you’ll have a good idea…
True unemployment is climbing. The numbers that most politicians use exclude discouraged workers, students and some other groups completely from the equation.
So, to get a better picture of what’s happening, we can use labor force participation. It’s dropped since the year 2000. Even the longest bull market in U.S. history – which recently ended – saw a decrease in labor force participation. It’s not a great sign.
Our economy has already replaced millions of jobs with software and other technologies. Automation is improving at a faster rate and already, new jobs can’t keep up. On top of that, many of the new jobs that do pop up require higher levels of education.
People are forced into school longer to obtain many of the new jobs. Now, that’s not all bad. There are many benefits to a higher education… but it’s created higher enrollment demand at universities. As a result, college tuition has increased.
I graduated in 2014 and was paying about $20,000 a year for a public in-state college – luckily, I had some scholarships to help. And to compare, my dad paid only $2,000 annually 40 years before that. So, that works out to over a 400% increase in cost and it easily outpaces inflation.
This increase in education costs is largely from the new economic paradigm we’ve entered. It’s the first core problem that’s led to the student loan debt crisis. Now, the second problem comes from the heavy-handed government…
Government Student Loans Warp Free Markets
The first government-backed student loans showed up over 50 years ago. The Higher Education Act of 1965 set the stage for more government action.
Of course, politicians created this Act and following programs with good intentions… but it’s made the student loan problem worse. There’s a reason private loans cost more on average than the government loans…
It simply doesn’t make sense to offer many of the loans the government has given. For example, lending $30,000 a year to most art or political science students doesn’t make sense, along with many other degrees. According to glassdoor, the average base pay for a political science salary is just over $48,000. And recent graduates starting out likely make less on average.
The math just doesn’t make sense and millions of graduates are struggling to make ends meet. The government is well-intentioned, but its student lending programs are a far cry from their original roots. The government is an enabler of many bad loans. And many students don’t know any better.
Universities and other education institutions have enjoyed this artificial demand. It’s allowed them to push tuition fees higher.
So, there you have it… These are the core problems with the student loan crisis and I want to leave you with a final thought…
Many people don’t realize that the government created the financial tools that led to the housing bubble. There are many similarities with the student loan debt bubble… but they won’t burst in a similar fashion.