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April 7, 2016

With 43% Not Paying, When Will Student Loans Collapse?

With leftists telling students education should be free, why pay the bill?

About 22 million Americans, or 43% of the students who borrowed money from the U.S. government to pay for school, are not making their repayments, according to the Wall Street Journal. Altogether, those 22 million Americans owe $200 billion in debt. Already, 3.6 million of those former students did not make a single payment in 2015 and are in default. This raises questions: When will this bubble collapse, and what will be brought down with it?

The government created a system that gave out loans to anyone who asked for one. There are no cosigners, nor does the government verify that the people to whom they loan money are prepared for the rigors of college. Credit checks? That’s a little used tool on youth headed for the Ivy League — or Podunk Community College.

In his column titled “The U.S. education bubble is now upon us,” Mohamed El-Erian notes that student loan debt dwarfs the combined debt of credit cards and auto loans. And while the cost of higher education has skyrocketed, the value of that piece of paper at the end of four years has deteriorated because students are leaving university struggling to find employment in their fields of study.

The student loan market is not like the housing bubble of 2008, however. Unlike a conventional loan company, the government has the power to garnish wages and seize tax refunds. But the risk to the whole system is huge: Federal financial assets are 45% made up of student loans — even while there’s a culture that fosters not repaying those loans. Under one repayment plan, the Department of Education forgives outstanding loans after 20-25 years. And with all the leftists out there telling students education should be free, why pay the bill?

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