Student Loan Lenders Creating a New Credit Bubble

Oct 04, 2007

In only one year's time, the market for private student loan-backed securities has seen an increase of 76 percent. According to a new study, the result is an enormous and dangerous credit bubble similar to the one recently seen in mortgage markets. If the bubble pops, serious damage to the economy is expected.

Student Borrowing Facts

  • Average tuition has increased 79 percent in 10 years.
  • The maximum amount an individual can get in government-guaranteed student loans, (which have rates below 6.8 percent) is $23,000-and has been for the last 4 years regardless of significant increases in tuition costs.
  • In 2001, $4 billion worth of student loans were issued. Last year, the amount increased to $17 billion.

Source: American Association of Collegiate Registrars and Admissions Officers

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Meltdown in the Making?

The private student loan business is booming. Specialized student loan lenders are cropping up all over the place, and many established lenders have jumped on the student lending bandwagon.

With tuition costs rising faster than a speeding bullet, students have been forced to go along on this wild ride. Student borrowing has increased from $38 billion in 1995 to a whopping $85 billion in 2006.

The big question has become whether or not these students will ever be able to afford to pay back the amounts they are being forced to borrow today. Many experts say the answer is no.

New York Attorney General Andrew Cuomo, who recently conducted a nationwide investigation of the student loan industry, says that many graduates owe more in student loans than homeowners owe in mortgage loans.

Cuomo also notes that the parallels between the student loan industry and the mortgage market are 'provocative'.

Investors are clamoring to purchase bundled student loans. According to Moody's, the market for private student loan-backed securities has seen an increase of 76 percent in the last year alone.

The same thing happened in the sub prime mortgage market during 2005 and 2006. There has since been a 'meltdown' in the industry. A total of 161 mortgage lenders have imploded since late 2006 (source: Mortgage Lender Implode-O-Meter), and more than 2 million mortgage borrowers are expected to default on their mortgage loans before the end of 2008.

'Should private student loans suffer the same sort of failure as (sub prime) mortgages, as students graduate or drop out and find themselves unable to pay, we will do serious damage - not only to the lives of many students, but also to the economic and social fabric of our country that depends on college graduates for its strength,' said Luke Swarthout at the U.S. Public Interest Research Group.

There is currently no organization that tracks student loan defaults. If a widespread meltdown did occur, it would likely turn into a full-blown crisis before anyone noticed.

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