Could Change in Federal Policy Pop the Student Loan Bubble?
Total household debt has climbed to a record $13 trillion. One factor driving overall American indebtedness higher is the ever-increasing burden of student loans, and a policy change being mulled by the Trump administration could cause that student loan bubble to pop.
Student loan debt stands at a staggering $1.4 trillion, owed by some 44.2 million borrowers. The average class of 2016 graduate has $37,172 in student loan debt. That represents a 6% increase from the previous year.
Outstanding student loan balances increased by 1.5% in Q4 2017 and delinquency levels remain high. About 11% of aggregate student loan debt was 90+ days delinquent or in default in the last quarter of 2017. The number of borrowers either in deferment, default or forbearance stands at approximately 10.5 million. In other words, nearly a quarter of Americans with outstanding student loans are struggling to make their payments.
As we reported last year, student loan debt is one of the biggest factors driving a growing trend of millennials struggling to transition into adulthood. The average student loan borrower pays $351 per month to service those loans.
An announcement last week by the US Department of Education Could have a major impact on the student loan market. It might even pop the student loan bubble. The DoE announced it plans to review the policies for discharging student loan debt in bankruptcy, signaling it may ease those standards, and make it easier for overburdened borrowers to simply walk away from their debt.
In most cases, federal rules put in place in the 1970s make it next to impossible to discharge student loan debt through bankruptcy. Anyone hoping to do so must prove “undue hardship,” something Congress never defined.
In 2015, Robert Murphy sued in an effort to get his $240,000 in student loans discharged through bankruptcy. The unemployed 65-year-old was ultimately successful. The Department of Education and Education Credit Management Corp. settled with Murphy. At the time, many thought Murphy’s case would set a precedent making it easier to discharge student loans in bankruptcy proceedings. But because the DoE and the loan servicing company settled with Murphy, the case did not set a precedent.
At the time, Emery University Law Professor Rafael Pardo said the court decision could prove disastrous for the US Department of Education.
It could be a really dangerous thing for them if the First Circuit announces a rule for debtors to discharge their loans in bankruptcy. That would call into question how much of this $1.2 (now $1,4) trillion [in student debt] is collectable.”
The Trump administration could do what Murphy’s case didn’t — set the stage for millions of borrowers to shed their student loan debt through bankruptcy.
As Peter Schiff pointed out in a 2015 interview with Tom Woods, this is a problem that was actually created by the federal government, not unlike the housing bubble. And it’s not just a problem for students and student loan lenders.
I wrote a lot about student loan problems in my book The Real Crash. It’s a perfect example of the government creating a problem, then presenting itself as a solution to the problem it created, then making the problem worse. College used to be very affordable … Not everybody did go, because not everybody needed to go to college. The government all of a sudden sees a bunch of college students and they want their votes. ‘Hey, we’ll make it easier for you, so you don’t have to go out and get a job to go to college. We’ll loan you some money. And we’ll guarantee your loans so you can borrow money at a really, really low rate of interest. So, it will be like a US Treasury because the US government is going to guarantee it…
“Government wanted to make college more affordable. They made it more expensive. And at the same time, they destroyed the value of the degree. It costs more to get a degree, and the degree is worth less because everyone now has one. If you actually want to differentiate yourself, you got to get a master’s degree. You got to get a PhD. A college degree means nothing. I think a college degree today has less marketable value than a high school diploma did before the government started subsidizing college. This whole bubble is going to burst…”
The bottom line is the federal government guarantees these trillions of dollars in outstanding student loans. That means ultimately, the US taxpayer hangs on the hook for student loan defaults.
The student loan debt is emblematic of a larger problem in America. When the student loan bubble eventually pops, it will add to the already massive federal debt burden. It’s just one more example of abuse that points to the eventual collapse of the US dollar.
The bottom line is that the student debt bubble will ultimately impact US markets and average Americans. You can learn more, and how to prepare yourself, in Peter’s white paper The Student Loan Bubble: Gambling with America’s Future. Get the free download HERE.
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