Student Loans

Is the Student Loan Bubble Starting to Pop?

For-profit colleges close after feds turn off easy loan spigot

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Have we heard the first pop in a bursting student-loan bubble? After Santa Ana, California-based Corinthian Colleges this month filed for bankruptcy and announced the closure of its remaining for-profit college campuses, talk in Congress and the Legislature has revolved around proposals to bail out student debt for as many as 16,000 students.

Financial analysts have for years warned about the parallels between easy student loan debt and the easy mortgages that led to anartificially inflated housing market in the mid-2000s, and the resulting price drops and foreclosure bonanza. Maybe it's time to reignite those discussions.

"Corinthian's meltdown began last year after the U.S. Education Department reduced its access to federal student aid," reported Bloomberg News. It sold half of its 107 campuses "amid allegations that it falsified grades, attendance and job-placement rates." The company denies allegations and blames state attorneys general — including California's — for legal action that made it tough to sell the other campuses.

Under federal loan rules, some students may be eligible for loan forgiveness — at a possible cost of more than $200 million to taxpayers. But the attorneys general, some U.S. senators and a group of protesting Corinthian students dubbed the "Corinthian 100" are pushing for a broader loan-forgiveness package that could cost as much as $1.5 billion.

Democratic and Republican leaders of the California Assembly in late April announced legislation that would waive community college fees for these students, provide them with legal assistance, offer "tuition recovery" to many online students, and create a "Closed Schools Task Force" to help them get back on their feet.

Some critics blame the for-profit nature of these colleges, but in other parts of the country some for-profit colleges are simply turning themselves into nonprofit colleges — and that allows them to get an even higher percentage of their revenues from the government (100 percent rather than 90 percent, according to a Miami Herald report).

The basic allegations: Many schools would use the hard sell to sign up students — often lower-income people, minorities, veterans and vulnerable people — and make dubious promises. The students would be in debt for iffy degrees, and the schools would rake in billions in profits.

No question, the students in the Corinthian situation in particular are left in a bad situation. Their credits are not easily transferable and they are stuck with questionable or unfinished degrees. But loan forgiveness could create a wave of bailouts that ripples across the nation's educational system. Economist Richard Vedder argued in The New York Times that such a policy only "encourages students to borrow excessively, thinking they will not have to repay loans."

If bailouts are problematic, what are other solutions? Some critics want tougher standards for the accreditation agencies. (That, too, offers echoes of the housing bubble given allegations that rating agencies failed to adequately warn about the condition of some of the nation's mortgage lenders.)

Others blame federal education officials for taking so long to clamp down on Corinthian. The problem might even work itself out. Money/CNN reported that enrollment at the University of Phoenix, the nation's largest for-profit college chain, dropped by more than 50 percent in the last five years amid bad press about for-profit colleges.

President Barack Obama argues community colleges, the obvious alternative for students pursuing career training, should offer free tuition to pick up the slack. But one reason for past growth in for-profit career colleges is community colleges are priced so low they are overrun with students, who often cannot get classes they need in a reasonable time.

These ideas miss the core problem. Corinthian collapsed after federal officials turned off the loan spigot, given that its business model was based on free-flowing federal loan money. Even the nation's most prestigious university systems are ultimately funded by student loan debt, which may be why many of them have massive bureaucracies.

Debt-related problems have emerged first at these controversial for-profit institutions, but how long before a deflating loan bubble affects the nation's entire higher-education system?

NEXT: Dropped Charges Reflect Doubts About Legality of Freddie Gray's Knife

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  1. Almost sounds like now is the time to buy in if I can walk away from the prodigious debt with a degree, years without having to work, partying with a parade of twenty-something coeds, and no regrets.

    1. how do you think European nations keep their unemployment rate artificially low? they send then to university on the tax payer’s dime.

      1. And they put people on generous social welfare programs that don’t require them to be actively seeking work.

    2. In fact, if forgiveness starts gaining traction I’m going to feel like a chump. Twelve credit hours for the summer ran me a measly seven hundred bucks, which I paid out of pocket. I’ve been parsimonious with my time and money, working full-time and taking classes in the evening. I’m slated to transfer to an unpretentious university in a few terms when I exhaust the cheap credits here. I am supposedly doing it right, but if the loans model falls apart by the time I graduate it’s going to look like I wasted years working hard when I might have partied and fucked my way through a leisurely degree at a prestigious school.

      1. that’s what we call “picking winners and losers”.

        1. Probably right. Victims studies majors, along with library sciences, archeology, and art history students will be the first pardoned from their debt. Law students won’t be too far behind. The cretins who had the audacity to major in STEM will be expected to pay back every cent.

      2. I will feel quite angry, given that I don’t have a degree at all. Nobody was around to hand me a free college education back in my day, but now I’m obliged to pay for some petulant whiner’s “degree” in Womyn’s Studies?

        1. Fact: the “taxpayer” has never paid for federal student loans. Boomers need to get their basic facts straight.

          FFELP was private capital. Direct fed lending has been funded by selling US bonds, mostly to the Federal Reserve.

          We have 18 trillion in debt because whiney BOOMERS NEVER PAID FOR SQUAT and you never will.

      3. We should restore bankruptcy. It was anti-free-market to remove it in the first place.

        Unless you took loans under the FFELP program, the money that you were lent by the DOE was printed. No taxpayer contributed it, nobody worked for it.

        DOE “direct” federal student loan borrowing was done out of earmarks from US Treasury bond auctions, and the Fed up until very recently had been buying 100% FTE of the Treasury auctions.

        We should have student loan forgiveness? Why not? The money that went to fund those loans is supposed to be only a temporary expansion of the money supply. When the Fed goes to unwind its balance sheet and contract monetary supply, why should the loans created with that money still exist?

        It’s a ponzi scheme. My generation got F’ed in the A.

        I won’t pay my loans. They were all “direct.” The money was printed, the inflation was caused by the fed, the school defrauded me, and the jobs to support repayment do not exist.

        1. When things go to far and real people wise up the revolution will begin. Join us when we slaughter progressivekind. Then you can take whatever you need from. Their ill gotten plunder of real Americans.

          Or something like that.

        2. CBear – all of your comments on this thread have been spot on and I have learned so much from what you’ve written.

          I think what needs to happen is more college students across the country need to stand together and revolt. The debt that we have with doubling interest rates are out of control and keep us under debt for most of our lives! My aunt just finished paying off her student loans at 60 years old! Most of my generation (mellenials) will go to the grave with debt. My question for you is – legally what would happen to me if I just stopped paying my student loans (federal and private) ?

  2. The student loan bubble differs from the mortgage loan bubble in one critical way:

    Even progressives don’t believe an expensive house is a human right.

    The student loan bubble can expand as long as the economy hasn’t completely collapsed.

    1. Even progressives don’t believe an expensive house is a human right.

      Not yet…

    2. Also, with student loans there is no asset to foreclose for repossession.

      1. Also, student loans exist because the federal government caused insane tuition inflation, necessitating borrowing.

        The federal government is lending deficit funds to students, and if and when they pay, they ARE NOT paying down the national debt, but spending it.

        800 billion of the 1.3 billion in student debt is counted in the 18 trillion already.

        Also, with US Treasury bonds there is no asset to foreclose for repossession, we just print more money.

  3. For-profit colleges have to remain solvent, public colleges can be insolvent longer than you can.

  4. Time for a soak-the-rich tax! /progderp

  5. Ever since 2010, the Department of Education has been lending DEFICIT FUNDS to students.

    Up until October 2014, the Federal Reserve was monetizing basically all of the deficit.

    So, Congress was lending us PRINTED FUNDS at a ZERO COST BASIS for them, but wants to get paid back via dollars acquired through LABOR.

    And, while loans from direct federal lending are ALREADY counted in the deficit, IF we pay our loans they do not use the money to pay down the deficit!

    SO F THAT! DO NO PAY, KIDS, THIS IS PONZI SCHEME SO THE OLD PEOPLE CAN SUCK MORE MONEY OUT OF YOU!

    My generation inherits that 18 trillion and MORE. No 80 year old member of Congress can tell me whether I should have bankruptcy protection on a federal student loan. Those fossilized leeches never lent us a dime.

    DO NOT PAY, KIDS. DEFAULT THAT SHIT.

    1. Yeah – kids today are getting screwed.

      But in this case, they screwed themselves.

      The government provided the smack, the needle, the tourniquet, the spoon and the lighter.

      But the students stuck the needle in their own arms.

      1. It’s worse than that. It’s a vicious cycle. The credit availability allows tuition to rise, as tuition rises fewer and fewer people can pay cash, making the “choice” borrow or don’t go.

        Cira 2007 Congress removed the caps on PLUS loans to parents and those student borrows who qualify for a PLUS. I call that a conspiracy.

        And also, it really does not matter economically whether you think the students are culpable or not. This is a true bubble – the loans being made are objectively bad. The economic opportunity to repay them does not exist, which is why we are running INSANE real default rates on this stuff right now – north of 50%.

        Removing bankruptcy protection did not get anyone repaid. The feds are employing various tactics to mask the default rate (like IBR, PAYE) in order to keep the pressure off reform and keep a fiscal stimulus of 150 billion plus flowing to Boomer tenured professors of Grievance Studies and Fuck the Youth.

        For me, the question is whose problem is it? Whose business is it what we do with this bad debt?

        Emphatically it is not the business of 80 years olds in Congress who will be dead long before the student lending in the national debt comes due.

  6. Really? These “students” were stupid enough to spend other people’s money for four years before they discovered that their degrees were worthless? Sure, the Federal Government was a facilitator – like a heroin dealer pushing drugs to users – but do the users have no responsibility?

    That seems to be what the Corinthian 100 are arguing – that they were too stupid, too lazy, too oblivious to realize that 1) The “education” they were getting was crap, and 2) The Federally-guaranteed party had to end some day.

    The real solution here is to return government to its Constitutional role – which is to say, to slash its budget and power by 90% or more. Oh, and no more of the Federal Government spending money like a drunken sailor on shore leave. If the Corinthian 100 can’t do it, the Feds surely ought not to do so.

    1. There is a ton of punditry on this issue and it’s all assumptions. Let’s go with some basic facts instead.

      The “Corinthian 100” were and are making meritorious legal arguments as follows:

      First, the Higher Education Act requires the Department of Education to forgive the federal student loans of any student who cannot complete his degree because the school has closed. The “Closed School Discharge.” It’s the federal law, (and yes, I’m a lawyer), linked for your convenience:
      https://www.law.cornell.edu/cfr/text/34/685.214

      Second, if you’re interested in Constitutional law and States rights, you’ll be interested in this. The Master Promissory Notes of the Corinthian students, and indeed all the federal student loan borrowers, contain a term that avoids a federal-state law conflict by stating that the Department of Education may discharge (i.e. declare unenforceable under law) the student loans of a borrower where a “Defense to Repayment” exists against the debt under the law of the state of the student borrower.

      If you really want the back story on this mess got started, I suggest “Subprime Goes to College” by Steve Eisman (one of the guys who successfully shorted the housing bubble).

      P.S. A federal, student loan borrower circa 2010 or later – whose money were they spending? Not yours. We are not making student loans out of the budget, but out of deficit funds. I’ll leave it up to you to find out more about that “funding.”

      1. Just another “unexpected” consequence of Emperor Barack-I making the Federal Government the only source of student loans – in the interest of “fairness”.

  7. Time to totally turn off the spigot, disconnecting the pipe from the reservoir at the other end.
    I’m sure all the “diversity” coordinators will be able to find jobs, probably working alongside those they used to counsel who are at “Starbucks”.

    1. No. We just admit they were totally right about global warming and must abandon earth. Tell them we found a new planet to colonize. We will send three ships there. We will send them alomg first, to make sure we have a progressive paradise and do things right this time.

      Problem solved.

  8. I think we are looking at something happening soon just because of the fact that debt is looked at so much as a necessity versus something that is only used when needed.

  9. College’s continue the myth that a degree is absolutely necessary to make it in today’s world. The mush heads heading to college at any cost buy into to this lie. Now taking 5 yrs or more to get a degree, job prospects lower, degree is useless, who is being asked to shoulder the load? Why the taxpayer. Parents need to wake up, knowing they want the kids out of the house but also knowing they are entering a world of constant financial troubles and fast payday loans they are not ready for. Industry is changing everyday and moving towards more automation, greater productivity in the work place. Degree’s in subjects that have no relevancy to the needs today, why college’s love that.

  10. What would happen if I were to completely stop repayment on my federal and private student loans?

  11. The parents often remain very insecure when their children move out along with time. That is why, before the time comes, it is very important to hand them the lesson of how to manage personal finance, how to arrange inspiration funds to take out loans and how to wisely response in managing financial obligations. These lessons are lifetime lessons for the children to help them throughout the way of their life. Student loans can be helpful in these manners.

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