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THE MUSINGS OF A TRADITIONAL SOUTHERN DEMOCRAT

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Sid in his law office where he sits when meeting with clients. Observant eyes will notice the statuette of one of Sid's favorite Democrats.

Saturday, May 19, 2012

Number of the Week: Student Loan Bubble.

From The Wall Street Journal:

368%: The jump since 2007 in the measure of consumer credit held by the government comprised primarily of student loans.

If a student loan bubble were to pop, the government, not private banks, would be the one standing around with gum in its hair.

Issuance of student loans has soared in recent years, hitting $867 billion at the end of 2011, according to an analysis from the Federal Reserve Bank of New York, more than credit cards or auto loans. The jump has led some to classify the student-lending market as a bubble, comparing it with the housing mess that nearly brought down the banking system in 2008.

But there are some big differences between student loans and housing. For starters, mortgage credit absolutely dwarfs lending for higher education — by nearly a 10-to-1 ratio. Troubles in an $8 trillion market pose a much higher systemic risk.

The other big difference is who holds the loans. Commercial banks and investment firms held the bulk of the mortgages that were going sour when the housing bubble burst. But that’s not the case with student loans. Despite some recent signals of banks getting back into the student-loan business, private lending has been pretty much stagnant since the recession hit. Since December 2007 nonrevolving consumer lending by commercial banks — a measure tracked by the Federal Reserve that includes student loans as well as auto and other personal credit — is up less than 11%. Over the same period, total consumer loans owned by the federal government — a measure that includes loans originated by the Department of Education under the Federal Direct Loan Program — has more than quadrupled.

The good news in all of this is that if a student loan bubble pops, there’s little chance of a systemic crisis similar to the one that hit in 2008. But there’s still a lot of bad news to go around.

For one, though banks likely wouldn’t take a big hit, the government — meaning the taxpayer — would. That’s not great news for the deficit, but the numbers aren’t large enough to be a huge concern. At the same time, it’s much harder for the borrower to discharge a student loan than a mortgage. You can’t get rid of student loans in bankruptcy, for example. So there’s a much higher chance that the government would get its money back eventually.

The bulk of any burden from a student-loan debt bubble bursting is likely to fall on the borrowers themselves. While that means the broader economy can avoid a systemic crisis, it will struggle with a younger generation whose spending power is constrained limiting growth for years.

1 Comments:

Anonymous Business Cash Advance said...

I noticed the value of student loan when i was student. I think student loan is really necessary to poor students.
It's really an awesome publish. Keep publishing the great work later on too.

8:54 AM  

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