Iron bubble: Student loans help some, crush others

Published: Tuesday, Jan. 22 2013 10:05 a.m. MST

Graduates from Skyline High pose on May 31, 2012. Graduates from high school need to make decisions about student loans. Graduates from college need to make decisions on how to pay student loans.

Scott G. Winterton, Deseret News

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The subprime mortgage bubble burst like a bomb across the country in 2007 and 2008, putting many homeowners under water and the economy into a solid recession. Now, some analysts worry that the next big debt bubble could be student loans.

Some of the signs are already here.

The Consumer Financial Protection Bureau said last April that "outstanding student loan debt has crossed the $1 trillion mark. Student loans have eclipsed credit cards as the leading source of U.S. household debt outside of mortgages. In part, this is because more students are accessing higher education. But it's also because tuition and average debt levels have increased."

Then things got worse.

At the end of September, student-loan balances had a delinquency rate higher than credit cards, a Wall Street Journal article reported. Eleven percent of student-loan balances were behind 90 days or more.

The U.S. Department of Education released the latest numbers on federal student loan defaults in September. The department said 9.1 percent of borrowers whose first loan repayments came due in fiscal year 2010 had defaulted before the end of fiscal year 2011, which was higher than 2008's 8.8 percent. Of the more than 4.1 million borrowers during this time, almost 375,000 defaulted.

At the individual level, a student loan crisis is the result of poor choices about what loan to take out and managing the way the debt is paid. Some worry that an accumulation of individual defaults may become a broader national problem, like the subprime mortgage crisis. But the student loan "bubble" may be made of iron — large, imposing, but not going to pop anytime soon.

Mark Kantrowitz, a nationally recognized financial aid expert and publisher of Fastweb.com and FinAid.org, doesn't see imminent danger because of basic differences between what created the subprime mortgage problems and the current stresses in student loans.

Before the subprime mortgage crisis, people were flipping houses. They would buy a home, turn it around in a month and sell it for more. Many saw a 30 percent return on their brief investments.

"The value was circular," Kantrowitz says. "People were buying houses because the houses were appreciating. The appreciation was based upon the appreciation. It wasn't based upon the intrinsic value of that house found in the construction costs and the location."

With student loans, the problems are different, Kantrowitz says.

"You can't flip an education," he says. "The financial value of an education is based on the employment that it enables."

The value isn't artificially driven up and the purchased asset — the knowledge — can't be repossessed.

Kantrowitz does, however, admit that there are some "superficial similarities" to the subprime mortgage credit crisis of 2008 because loans were divvied out to homebuyers who were not likely to be able to repay. In a similar vein, federal student loans are given without looking at students' credit history because the goal is access, not profit.

The new bubble

But is there a student loan bubble?

"In order for there to be a bubble," Kantrowitz says, "there has to be a disconnect between the value of an asset and the price of an asset."

Homes were priced much higher than their real value. The prices rose because loans were so easy to get. When the ability to get those loans goes, the bubble bursts and the prices drop.

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