The Next Subprime Crisis- Student Loans and For- Profit Colleges

The Next Subprime Crisis- Student Loans and For- Profit Colleges

June 8, 2010

As we sort through the wreckage of the housing bubble, I see another, similar bubble emerging: a student loan crisis. Fueled by a combination of low lending standards, unrealistic expectations and the proliferation of for-profit universities, this crisis is likely to cost banks and the federal government significant sums of money. It will also leave borrowers subject to crippling debt for decades after they receive their degrees.

Americans have come to expect they should own a home and receive a college education (next up, health care). Actually being able to pay for either has not been part of the decision-making process. Financial institutions, chasing fees and government guarantees, are following the same path they took on their subprime mortgage adventures. The economy is producing fewer jobs and its impact on students' ability to repay their loans is similar to subprime mortgage borrowers. No job. No loan repayment. Worse, because student loan debt is generally not discharged by bankruptcy proceedings, students may labor under this debt for decades after graduation.

The debt incurred by students attending for-profit institutions and subprime mortgage loans are eerily similar. Both the subprime mortgage industry and for-profit college universities rely on loans made to low-income borrowers who are less likely to be able to meet their obligations. (Phoenix University, for example, relied on $1.8 billion in federal student aid last year.) Repayment of subprime mortgage loans requires a housing market that continuously appreciates. Repayment of debt to pay for-profit school tuition requires that students obtain good paying jobs upon graduation. In fact, many students who borrow money for tuition never receive a degree. (By one count Phoenix University has an 86% drop-out rate.) In both situations, taxpayers bear the cost of defaults.

The bail out of subprime mortgage borrowers is costing hundreds of millions of federal dollars and for-profit tuition debt will cost the taxpayer as well. Some industry analysts predict that defaults of for-profit university tuition debt could exceed $275 billion in the next ten years.

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