Five Ways the Student Loan Bubble Mirrors the Housing Crisis

NCPA October 31, 2012

There are some striking similarities between the private student loan market and subprime mortgage industry. A new report from the Consumer Financial Protection Bureau (CFPB), provides more evidence for the comparison, says the Fiscal Times.

• The report analyzed roughly 2,900 complaints, comments and other submissions and input from borrowers since March of this year.
• With student loan debt crossing the $1 trillion milestone earlier this year, and private student loans accounting for more than $150 billion of that, another crisis could be on the horizon.
• There are at least $8 billion of private student loans in default, representing more than 850,000 individual loans, according to the report.

It's hard to predict when the student loan meltdown could occur, but if the bubble explodes, the consequences will be devastating for the economy, says Howard Dvorkin, author of Credit Hell. Here is a look at the similarities between the subprime mortgage industry and the private student loan market:

• Good intentions gone bad. American society put a high premium on two goals -- education and home ownership. However, the reality is that not everyone has the ability to achieve both successfully.
• Misleading interest rates. Artificially low interest rates characterize both of these industries. With mortgages, the motivation was to stimulate home ownership; with student loans, it was to promote education. Many students don't know that the interest rate on these loans will increase radically in coming years. Loans can go from 5 percent to 18 percent.
• Lack of scrutiny. A weak screening mechanism to vet applicants is another concern.
• Government guarantees. According to the House Education and Labor Committee, there were occasions when $8.80 for every $10 spent in student loan came from the federal government. The government acting as the backbone for the loans raises concerns about long term debts.
• High-pressure sales tactics.

There is one distinction from the housing market: the private student loan market is smaller.

Source: Sheryl Nance-Nash, "Five Ways the Student Loan Bubble Mirrors the Housing Crisis," Fiscal Times, October 25, 2012. "Annual Report of the CFPB Student Loan Ombudsman," Consumer Financial Protection Bureau, October 16, 2012.