Are Parent & Student Loans the Next Bubble?

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Are Parent & Student Loans the Next Bubble?

For a few years now, I’ve been adamantly drawing attention to the student loan/debt pile that is mounting in our nation. In fact, I’ve dedicated the last year of my graduate schooling to looking at this effect on North Carolina (more on that to come soon). What we have though, is far worse than the housing crisis of just a decade ago. Luckily, it it receiving more attention as the problem grows. The question is: will anything be done about it?

In this morning’s Wall Street Journal an article, The U.S. Makes It Easy for Parents to Get College Loans—Repaying Them Is Another Story, highlights how the parent side of student loans is as large of a problem as the student loans. Their subheading says it all:

The federal Parent Plus loan program has millions of borrowers, many with subprime credit ratings; its default rate exceeds the rate for U.S. mortgages at the peak of the housing crisis.

If you can stomach the rest of the article, it goes on to describe how the federal government, with essentially no financial information about the parents, has been handing out billions in loans. More than 11% of those borrowers haven’t made a payment in more than a year, with another large chunk at least a month behind.

These Parent loans, known as PLUS loans, are a major problem, being handed out to those with subprime credit scores and no effectual method of repayment. One such borrower in their article had no job, poor credit, existing debt, and now an additional $100,000 between PLUS loans and their own new student loans.

Nearly four in 10 student loans—the vast majority of them federal ones—went to borrowers with credit scores below the subprime threshold of 620, indicating they were at the highest risk of defaulting, according to a Wall Street Journal analysis of data from credit-rating firm Equifax Inc. That figure excludes borrowers, such as many 18-year-old freshmen, who lacked scores because of shallow credit histories. By comparison, subprime mortgages peaked at nearly 20% of all mortgage originations in 2006.

One of the most dangerous parts of this for the long-term economy is that federal college loans do not qualify for bankruptcy. So while subprime mortgage holders could get out from under their poor decisions, these parents, and their kids, are stuck with these for life. A stranglehold on our future for sure.

At least with the housing bubble, those who were bailed out still had a home. What good is a college degree as collateral anyway?

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