Subprime Student Loans and the Next Recession
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UPDATED: Jul 23, 2012
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Amidst worries and predictions that a second recession is on its way, economists are beginning to point their fingers at what they believe is one of the largest culprits: student loans.
The 2008 recession was a product of the housing market’s collapse. Real estate values skyrocketed at the turn of the century and everybody was trying to grab a piece of the action. Nearly everybody who was a renter wanted to be an owner, and the nation saw an influx in the real estate agent’s and broker’s licenses that were handed out.
Banks, private lenders, agents, and brokers all colluded to supply the nation with properties to meet its demand. That collusion sparked the no-doc subprime mortgage loan.
No-doc subprime mortgages were loans originated to bad-credit borrowers who didn’t have an adequate income to maintain their financing. Lenders would simply ask their applicants how much they made. If the applicant didn’t make enough for the amount of money they wanted to borrow, the lender would say he didn’t need any documentation of an applicant’s income (hence the title “no-doc”), and, with a wink, that he’d write down whatever number he was told.
Consequently, countless homeowners wound up with financing that they had no chance of sustaining for any extended period of time.
They defaulted en masse, and, well, we know what happened next as we’re living through it now.
‘Subprime-Style Lending Went to College’
But even though we now realize subprime loans played a major part in the creation of this most recent economic crisis, they haven’t gone away.
Instead subprime loans just morphed into something else. Like a flu or cold virus, no-doc subprime loans simply evolved to target somebody else without the proper defenses built up to counter its new form.
Now those interested in applying for college loans are the targets. Enter the subprime student loan.
“Subprime-style lending went to college, and now students are paying the price,” said Education Secretary Arne Duncan, to The Associated Press.
Between 2005 and 2007, colleges cut back on their financial advising, and students—who were now forced to borrow blindly—began taking out student loans of much higher amounts, according ABC News.
This trend of financing larger student loans wasn’t just a small bump either.
According to the Consumer Financial Protection Bureau (CFPB), the private student loan industry grew from less than $5 billion in 2001 to more than $20 billion in 2008. However, when banks began to tighten their credit requirements—the mechanism directly related to subprime lending standards—private student loans dropped to less than $5 billion again.
But the damage had already been done.
“Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed. They are now overwhelmed by debt and regret the decisions they made,” said Richard Cordray, director of the CFPB, in a prepared speech.
The Fuse is Lit
The nation’s student loan debt has now sailed past the nation’s total outstanding credit card debt, resting beyond $1 trillion. That’s a $1 trillion debt bomb that, if it explodes, may leave our financial institutions and higher education facilities completely crippled.
Additionally, borrowers who have been paralyzed by remarkably high student loan monthly payments have begun to express their feelings in less-than-desirable ways.
With an unemployment rate of near 9 percent—and a less-measured underemployment rate probably sitting much higher than that—current college-goers and recent graduates are taking to the streets to protest their education loans.
The Occupy Wall Street (OWS) movement has been an enormous place of refuge for this forgotten population, and has since helped spur several websites and social movements designed to provide aid, comfort, and camaraderie to those struggling with student loans.
Now, with so many unable to pay for their college financing, we must sit idle, watching as either our economy picks up and these debtors can satisfy their payments, or as they collectively default and spur yet another nation-wide recession.