Looming Student Loans Crisis Mirrors Subprime Mortgage Bubble, Study Warns

Kim LaCapria - Author

Jun. 15 2013, Updated 9:46 p.m. ET

Student loans are pegged as the next big financial crisis coming down the pike towards an already over-leveraged, over-strapped and overly-in-debt American populace, and a new study reveals that the shape of the supposedly-coming crisis is not all too different from the last devastating debt debacle, the mortgage crisis.

Student loans loom large over young people nowadays, as the cost of college has skyrocketed in the previous decade. Compounding the issue is a weak jobs market, ensuring many recent grads are unable to keep up with student loan payments following graduation.

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But while student loans have, even to the casual observer, become a shakier bet, it doesn’t seem private lenders have been adjusting practices or heeding the lessons we all learned from the economic meltdown just a scant few years ago — in fact, it appears to be business as usual for the banks lending money to hopeful college students, and a new study reveals that a similar crisis is likely brewing.

As the Associated Press points out, student loans differ from personal debt in a very important way — they cannot be discharged in nearly all circumstances except for death. The study, set to be released on Friday, confirms that private lenders emboldened in part by the binding nature of student loans, often offered borrowers large amounts despite being uncertain that those borrowing were able to pay.

Then the banks repackaged and sold the shady loans to other institutions to purge their books of the potentially likely-to-default student loans. Sound familiar?

Education Secretary Arne Duncan commented on the study, saying:

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“Subprime-style lending went to college, and now students are paying the price.”

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Richard Cordray is head of the Consumer Financial Protection Bureau, which headed up the study along with the Department of Education. Cordray added that many “student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford.”


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