With more than $1.2 trillion in collective student debt, Americans are more indebted than ever before and banks are beginning to realize that future generations of students will be unable to repay their loans.
One by one, banks across the U.S. have been scaling back or canceling their student loan programs. JPMorgan Chase followed U.S. Bank this week, becoming the latest financial institution to close down its student loan program. Some financial experts read this as a sign that the student loan bubble could soon burst, mimicking a subprime mortgage crisis of 2007, when the inability of borrowers to pay back variable rate loans led to 4 million home foreclosures and triggered the 2008 financial recession.
The announcement that the nation’s largest bank was pulling out of the student loan market follows years of college graduates leaving school with an average of $26,000 of debt, some owing much larger sums that will take decades to pay back in full.
2007 all over again?
«Over the last five years, students have increasingly relied on government-backed loans,» said JPMorgan spokeswoman Trish Wexler. “As a result, we no longer see meaningful growth in this market.”
That may seem like a straightforward explanation for why big banks are closing down their student lending programs, but the announcement has some commentators worried that the rhetoric smacks of the 2007 subprime mortgage crisis.
“The move is eerily reminiscent of the subprime shutdown that happened in 2007. Each time a bank shuttered its subprime unit, the news was presented in much the same way that JPMorgan is spinning the end of its student lending,” CNBC reports.
Flashback to 2007 in the leadup to the subprime mortgage crisis, when banks were faced with a somewhat similar situation. The largest financial institutions were marketing adjustable rate mortgages to borrowers, overextending their credit in doing so. This means that based upon the annual incomes of borrowers, banks were knowingly extending credit to high risk individuals who were likely to default.
This situation was made worse with the proliferation of stated income loans, commonly known as “liars loans,” which allowed loan officers to issue loans without actually verifying the income of an applicant. There were even confirmed instances when loan officers knowingly falsified the income of an applicant in order to approve them for a loan — knowing they were unlikely to repay what they had borrowed.
Similar to the student loan situation today, banks began shutting down their subprime mortgage lending programs when it was time to jump ship, simply saying that they were no longer profitable investments.
«It’s no longer sustainable and not the right place to allocate capital in the future,» HSBC Holdings Group Chief Executive Michael Geoghegan said in a statement the day HSBC shut down its subprime unit in 2007.
Some commentators caution that it may be premature to label student loans as the next financial bubble to burst. Financial institutions may simply see this type of lending as a low-return market, a plausible reason to close existing programs.
Collectively, banks issued less than $6 billion worth of college loans in 2011, a fraction of the $100 billion in loans the federal government issues to students every year.
JPMorgan owned $5 billion in student loan debt, a fraction of the more than $50 billion in auto loans and $120 billion in credit card debt it owns. Delinquency on its student loans still stands at a mere 2.23 percent, according to JP Morgan’s quarterly report.
“Altogether, there’s simply no sign that defaults could have been grave enough to drive the bank out of college lending. The simpler explanation is that JPMorgan gave up on its student loan business because it wasn’t much of a business.” Jordan Weissman wrote for the Atlantic.
It’s the economy, stupid
With $8 billion of private student loans in default, that doesn’t mean that there isn’t anything to worry about. Whether subprime mortgages or student loans, one of the underlying concerns is an inability of borrowers to pay creditors back and clear their debts.
Paying back these loans has been made much more difficult by the stagnant U.S. economy. Obtaining more education is seen by some as a panacea to economic woes, but it doesn’t always lead to higher-paying jobs or financial security.
Kelly Mears, a political science student at Union College in Schenectady, N.Y., expects to graduate in 2015 with $100,000 in debt. «It just seems to be a part of the growing American experience to go to school, graduate and work off that debt for the rest of your life,» Mears told CNN Money.
Tuition, room and board and student fees at Union College, a competitive liberal arts school, total $58,248 for the 2013-2014 academic year. Because her parents are considered middle income, Mears doesn’t qualify for financial aid.
Halfway through college, Mears has $66,000 in loans, the majority of which come from private banks. About $12,000 are government loans. Mears’ case might be one of the more extreme cases of student loan debt — the New York Federal Reserve estimates that about 3.1 percent of college graduates will now leave school with at least $100,000 in debt.
Degree in hand, graduates like Mears are finding it more difficult to find jobs in their field — years after the 2008 financial crisis.
Where are they working? Believe it or not, many are turning to the food services sector and part-time work. The image of the fast food industry populated by teenagers looking to earn some extra pocket money is long gone — fast food workers are now older and better educated on average than before the recession.
About 43.2 percent of low-wage workers have some college education, a college degree or an advanced degree. Additionally, MSN Money reports that there are roughly 284,000 college grads making the federal minimum wage of $7.25, up 70 percent from 10 years ago.