Double Double, Here Comes Another Bubble
Posted On April 7, 2019
Financial Analysts Call the Education Debt Problem the Next Big Bubble
Most people reading this will remember the Sub-Prime Mortgage Crisis. For those who do not, it was an inadequate system of over-regulation riddled with loopholes allowing for hundreds of thousands of people to get loans, without any collateral other than their new home, that they really had no chance of paying off without speculating in the market.
When the market tanked in the Bush/Obama recession, the people’s “bonus” money that they were using to make ends meet on their mortgage payments dried up. This caused hundreds of thousands of people to fall behind on their loans. The banks who had exploited the financial situation of the United States were all too quick to foreclose on those loans, which many of the banks knew were illegal.
Education Loans are Next Bubble
Though some banks, like Wells Fargo, were caught by the federal government and forced to pay a settlement, most of the banks collected people’s houses, sold them for pennies on the dollar, using the profits to fight for new “lax” banking regulations which would allow the process to happen again. Unfortunately, banks are a very creative industry – they see areas that can be exploited for higher profits and they use what they find. This causes bubbles like the Sub-Prime debacle. Anywhere the government guarantees loans, there is this problem. The experts predict the next big bubble will be the education loan system.
The student loan system is really the perfect storm for corruption and graft in the banking world. In 1965 the United States federal government started the Federal Family Education Program (FFEL). The program launched under FFEL was initially set up in two different areas, direct loans, which were seen as a “cost” for the government and guaranteed loans which the government had no upfront cost because the loans would only be paid back if the borrower defaulted on the loan. As you can guess, an “entitlement” which has no present cost is a great tool to get a congressperson elected, so the FFEL program was a resounding success with politicos in Washington, DC.
Secondary Markets are Bubble Makers
In the early 1990s, the government made a switch back to the direct loan program because it was seen as “safer” and cut out the cost of working with banks. This created a secondary market where the private sector could undercut the federal loan markets on the applications and then the rates and terms would be subject to change. This prompted Congress to allow the Department of Education to “buy” loans from private lenders to place students back in the federal program.
Then President, Obama signed a law repealing the FFEL program, which put all public student loans in the direct loan program managed by services. The limits on the loan program caused students to once again turn to private lenders, which leads us to the crisis of today. The kicker in this situation is that there are no bankruptcy protections for federal student loans.
Tangled Debts of Double Consolidation
So in our present scenario, we have a banking system that “manages” student loans via a subsidiary company with open options as to how they allow consolidation based on loose federal guidelines designed to encourage it. Thus banks, via their companies, consolidate loans into federal programs which are then consolidated into their federal loan holdings in their management companies.
Once the funds are in the federal programs, students lose the bankruptcy protection that would allow them to escape the debt. Now, should the education that they spent $100,000’s of dollars on not get them a job, let alone a job that allows them to pay back the loan, what happens? The federal government has instituted several programs to ease this debt, but the record is shaky. In one program, of the 30,000+ applicants to apply for loan forgiveness only approximately 275 were accepted. The rest are still wallowing in massive debt. As Jamie Dimon of JP Morgan Chase has noted, the $1.5 trillion deficit is going to have an adverse effect on the economy – we just do not know when.
As Washington, DC scrambles to try to address the problem, they need to realize that they are the problem. The over-regulation of the educational space has led to this bubble. It is going to take wiping the slate clean with new laws and new social mores to solve the problem without a massive failure as in the Sub Prime Bubble. Here are some of the steps that should be taken to deal with this epic failure of big government:
Steps to Help Students
- Give Students Bankruptcy Protections – Bankruptcy protection removes the threat of being in a debtors prison. When Congress eliminated this protection for student borrowers, they were effectively giving banks carte blanche to force students into an untenable situation. With no risk, banks give out more money than students can afford to pay back – the students who are under duress from rising college costs do not know any better than to take the loans. Then they are saddled with debt for the rest of their lives, crushing the economy. This leads to many not working and dependent upon the welfare system. This in turn overburdens Supplemental Security Income (SSI) system.
- Quit Giving Student Loans Out Like Candy – Public loans should go to the public education system. The government has gotten itself into trouble by funding the private, not-parochial school, which has allowed the national educational debt to explode. Taxpayer dollars should only be available to public schools, not for profit or not state-affiliated schools (parochial schools are the exception to this rule).
- Set Guidelines for Public University Staff Salaries – Depending on the need, public universities should be allowed to pay their faculty within reasonable amounts. Some state education employees have crept up near the million dollar mark in salaries as public schools try to compete with private schools for the best teachers. People like Senator Warren are making $430,000 for one class (though this was at a private school). We need reasonable salaries to ensure costs stay down.
- Set Guidelines for Majors – This may hurt some people’s feelings, but not all majors are created equal. We need to cut back loan funding on majors with the highest default rates. While doctors, lawyers, electricians, physicists, pharmacists, teachers, nurses, and a litany of other fields are necessary for society, there are dozens of majors across the country with sky-high default rates that are not. The department of education needs to look at what majors the nation needs and quit allowing colleges to funnel students into “general education” majors just to keep niche departments open. If you want to find these programs, do it through foundations.
- Prohibit Bank Involvement in Direct Loans – If direct loans are going to be direct, then cut the banks out of them. Make sure that loan management companies are not-for-profit companies with the student’s best interests in mind. When banks benefit not the education system, we are moving away from the goals of affordable education for anyone who earns their place there. Banks do not belong in student loans. They can do private loans, sponsorship and scholarships – there are some good banks out there that actively help students.
- Remove Protections for Private Loan Borrowers – Deregulate the private loan markets not the limited protections that the borrowers have, the government guarantees for high-risk loans. Everyone deserves an education. Not everyone deserves to go to $100,000 a year school. If you have credit trouble, then go to a reasonable college. If you are really that talented, then some scholarships can help you go to the expensive schools.
- Wipe Out the Current Debt – Yes, I said it. I know that this is a liberal position. On the other hand, we have over a trillion dollars in educational debt that banks took from people under duress in a lousy system. Let’s wipe out the debt, take the pro-bank regulations off the books and let the new system start based on needed majors and qualified students. Everybody has access to education, let’s make sure the system is fair.
How to Protect Your Kids from the Education Bubble
Some of these solutions walk down the narrow line between red and blue. Sometimes people become so enamored with the political team they are on that they do not see the damage that is being done to the country. The educational debt is over 5% of the national debt in size. If the educational debt is eliminated there will be an influx of that money into the common market and out of the banking market.
An additional measure that can be of use to help with this problem is to give up the tired old tropes about needing to go to a four-year college to get a good education. Community colleges and trade schools have a better record, better placement rates and are held to the same standards as four-year universities (sometimes higher standards). As a nation, the brainwashing of students in middle and high school needs to stop. People who go to community college or trade schools are not dumb.
Hundreds of successful business people, executives, politicians, and lawyers have graduated with a community college or trade school degree. Students with community college and trade school degrees also have a lower student loan cost (if they have any at all). If we encourage students, who are still in high school, to go to community college for two years and to a four year university for two years, they even graduate with the same degree but only 60% of the debt, which makes it easier for them to get out from under the yoke of the banking industry, without the government having to step in and create new loopholes.
Debt Creates Indentured Servants
Make no mistake, graduates are the indentured servants of the day. They have lost the protections of bankruptcy. The fruits of their labor are owned by the banks until their loans are paid off. Banks used the system to increase the debt ratio in this country. They did it through faulty laws that were created rife with loopholes because of lobbying efforts.
To solve the problem, grassroots efforts are needed to quit forcing students into unbearable student loan debt for the sake of image. Use the community college and trade school system as a tool to give your child the edge in life. Do not rely on the “general education” curriculum of big schools. Have your student learn their major and how to work in the real world. That way, when the ivory towers start to fall as the education bubble bursts, your student will not be one of the people caught in the crushing debt.
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Dr. Christopher Smithmyer is a writer for NRN, the Vice President of International Affairs at Brav Online Conflict Management, and an Adjunct Professor of MBA Business at Doane University. He is also part of the founding team at BlackWalletLTD, one of the leaders in stable coin 2.0 ecosystem maintenance. Dr. Smithmyer’s focus is international business and finance, along with reviews of board games, weapons platforms, and survival items.