The Fat Of The Land

Dane-o sent me this article on the possibility of a Student Debt bubble. I’m often wary of Zero Hedge: they are an odd mix of great analysis and sensationalist extrapolation.

The core of the story is that Jamie Dimon is pulling back hard on his student loan business. I’d divide my interest in this topic into a few areas: 1. If student loan defaults went bananas, should I be worried about systemic risk? 2. Are student loan defaults going bananas? 3. What does all this mean for higher education?

Ok, let’s start with 1. Is the student loan market systemically important?

First, how big is it? One estimate is 1 trillion (and that’s a high/overstated number), which is bigger than I’d expect. But my favorite view on the Great Recession is that even the housing collapse would have been a trivial shock if not for monetary tightening. And the US Mortgage market is about 10 trillion.

And you can walk away from your mortgage, wheres lenders have “broad powers” to seek repayment on student loans. Bankruptcy isn’t an option. That means that lenders aren’t going to feel much pressure to write the suckers down. No solvency risk means no systemic risk.

So why exit?

Probably because though they won’t sink the ship, they aren’t lifting the boat. Much is made of the large number of delinquent student loans. And 27% at 30 days past due is big. But in mortgages, at least, a lot of loans are ‘cured’ between 30 and 90 days, after which they’re considered in default. And anyway, you can’t kill a student loan with bankruptcy.

Following the chain of links leads us to an American Banker piece:

The CFPB recently began accepting student loan complaints on its website.

“I think there’s going to be a lot of emphasis and focus … in terms of what is deemed to be fair and what is over the line with collections and marketing,” Petrasic says, warning that “the challenge for the CFPB in this area is going to be trying to figure out how to set consumer protection standards without essentially eviscerating availability of the product.”

Outstanding student debt, including private and federal loans, has topped $1 trillion, surpassing previous estimates, the CFPB reported earlier this month.

More regulation, uncertain cash flows. Sounds like a plain old fashioned crappy business. Not much of a story.

What matters, to me, is the fact that the government owns most of this business and appears to be picking up share as private firms rush out. Higher education reform will be high on the agenda in the coming budgetary armageddon. Those costs have to come down somehow.

US the richest and most productive economy in history. And it is spending an all-time record *proportion* of that all-time mass of wealth on health care and education.

Education is not the most productive sector in the world. It’s just the fattest in the world.

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