Screwing around with loan markets to create huge bubbles, then blaming everything on what remains of the free market when they burst, has been a major socialist pastime since long before subprime mortgage perpetrator Barack Obama reached the Senate.
He’s been doing all that he can to recreate the mortgage bubble, the auto loan bubble is beginning to look ominous, and the student loan bubble may soon burst with a deafening $200 billion pop.
The Wall Street Journal reported on Wednesday that more than 40 percent of student-loan borrowers aren’t making payments:
While most have since left school and joined the workforce, 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1, according to a quarterly snapshot of the Education Department’s $1.2 trillion student-loan portfolio.
About 1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt, meaning they had gone at least a year without making a payment. Three million more owing roughly $66 billion were at least a month behind.
Meantime, another three million owing almost $110 billion were in “forbearance” or “deferment,” meaning they had received permission to temporarily halt payments due to a financial emergency, such as unemployment. The figures exclude borrowers still in school and those with government-guaranteed private loans.
The situation improved slightly from a year earlier, when the nonpayment rate was 46%, but that progress largely reflected a surge in those entering a program for distressed borrowers to lower their payments. Enrollment in those plans, which slash monthly bills by tying them to a small percentage of a borrower’s income, jumped 48% over the year to 4.6 million borrowers as of Jan. 1.
Behold the most expensive education system on the planet, where the only reason student loan nonpayment dipped slightly from last year is that a staggering number of people entered a program for “distressed borrowers.” The one thing Barack Obama’s policies are really good at manufacturing is distressed people.
Near the end of the WSJ piece, we learn that some of the people in these distressed-borrower programs have “monthly payments of zero, because their incomes were so low.” Meanwhile, the government’s more effective collection efforts against troubled borrowers are coming under fire from the ACLU and other activists, including charges that they “unfairly discriminate against black and Hispanic borrowers.” Concealing the redistribution of wealth beneath a maze of federal programs with high-minded goals does not change its nature.
The Journal goes on to note that these delinquencies are piling up despite collectors who make an average of two or three hundred attempts to contact borrowers before default. “Ninety percent of those borrowers, which include federal borrowers as well as those who hold private loans, never respond and more than half never make a single payment before they default,” according to loan-servicing corporation Navient.
Naturally, the federal education bureaucracy is brimming with creative excuses for why this is happening, and has plowed even more money into a “behavioral sciences unit” to “study the psychology of borrowers and why they don’t repay.”
While the Obama Administration pretends this is an inscrutable mystery, economist Carlo Salerno bluntly explained to the Wall Street Journal that “the government imposes virtually no credit checks on borrowers, requires no cosigners and doesn’t screen people for their preparedness for college-level course work.”
“On what planet does a financing vehicle with those kinds of terms and those kinds of performance metrics make sense?” Salerno asked.
Planet Socialism, that’s where.
The entire point of politicized economics is to suspend such common-sense elements of economic theory as the law of supply and demand, or the notion of carefully examining the credit-worthiness of a borrower before loaning them tens of thousands of dollars. Banks normally perform risk and reward calculations before issuing loans, and determining the repayment terms of those loans. Politicians declare that “evil” in their rush to transform the financial system into a piggy bank for giveaway programs.
In the end, it boils down to just another socialist redistribution scheme, because the rest of us are forced to carry the burden of massive loan defaults – from bailouts for “too big to fail” banks, to student loans that never get repaid. The subprime loan crisis created by Democrats like Obama, Barney Frank, and Chris Dodd was ultimately an insidious scheme to socialize the cost of houses for their preferred constituents, with a lot of big political donors getting rich along the way.
Maybe another reason for the crisis in unpaid student loans is that many of the indebted are listening to Democrat politicians, and have the notion that if they wait long enough, their debts will be at least partially waved aside, in exchange for their votes.
TV host and tireless blue-collar labor advocate Mike Rowe was recently asked about the left-wing craze for “free” college. His response is well worth reading in full, but his thoughts on how easy money inflated the cost of college education are especially fascinating:
We start by exaggerating its importance. Then we call it a “right.” That creates demand and guarantees supply. Then we free up billions of dollars, and encourage millions of teenagers to borrow whatever it takes to pay the freight. The pressure on these kids is enormous – from their parents, their guidance counselors, and their peers. So they sign on the dotted line, and that’s that. Is it any wonder the cost of a degree has risen faster than the cost of food, energy, healthcare, and even real-estate? Is it any wonder some politicians want to fix the problem by forgiving the debt altogether and making college free for everyone?
Rowe noted the similarities between the student-loan bubble and the 2008 financial crisis, which also began when politicians “campaigned on the idea that home ownership was a fundamental part of the American Dream, and therefor a ‘right’ that all Americans should enjoy.” Instead of honestly socializing the cost of a housing subsidy program through old-fashioned tax-and-spend liberalism, those politicians drafted banks into service as an extremely expensive intermediary, to hide the true cost of Big Houses for Everybody from taxpayers.
Regulatory fiat is an inefficient, and dangerously unsustainable, but stealthy way to redistribute wealth… complete with made-to-order fall guys in the hated financial sector, to take the blame when it all falls apart.
Rowe also makes a fascinating point about how “creating demand and guaranteeing supply” pumped up the cost of education, and the accompanying loan bubble. Basic economics tells us that artificially increasing both demand and supply will inevitably play merry hell with prices, which rest at the intersection of the supply and demand curves. Politicians hate basic economics, and they want voters to forget everything they ever learned about the subject, so we’ll fall for the latest delusional claim that supply and demand can be fudged without driving prices berserk.
Supply is always shadowed by its close relative, quality. Political efforts to tinker with supply and demand leave quality unmoored from price, as anyone stuck with a lousy ObamaCare health insurance policy can tell you.
The same thing happened to student loans, as exemplified in the Wall Street Journal article by a cheerfully delinquent student-loan borrower who said his college “promised me everything,” but he feels he has “nothing to show for it except a piece of paper that doesn’t really do me any good.” This particular individual is a relatively modest $11,900 in debt, and has a job that pays $46,000 a year, but his sentiment is echoed by people with vastly higher debt burdens who can’t get a decent job, or find work at all, with their pricey diplomas.
It has been suggested that the damage from the auto-loan bubble will be mitigated by the presence of assets that can be easily repossessed (more easily than ever, in fact, thanks to remote vehicle tracking technology.) It was much more difficult to deal with the capital fallout from the home mortgage scandal.
It will be impossible with student loans… and depending on how the Left handles the latest crisis it deliberately manufactured, we could end up with a situation where few can borrow the kind of money they need to attend overpriced colleges that have been made needlessly mandatory, even as the quality of intellectual life on campus nose-dives into a swamp of trigger words, safe spaces, and useless politically-correct coursework.
We will, of course, be told the only possible solution to that crisis is “free” college, all the way to the Ph.D. level, one hundred percent controlled by the government. Some look at the student loan bubble with anticipation, rather than apprehension.