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GS: The Student Loan Bubble: Gambling with America’s Future
 
By Addison Quale, Precious Metals Specialist at SchiffGold

The federal government can’t seem to help itself. After overseeing the inflating and bursting of the dot-com bubble in the 1990s and the subprime mortgage bubble in the 2000s, the United States government is at it again – this time in the area of student loans.

Student loan debt now stands at a record $1.2 trillion, which represents the second largest category of consumer debt after home mortgages. It has grown by leaps and bounds since the financial crisis of 2008 and now surpasses even car loans and credit card debt.

As many are aware, the subprime mortgage bubble was encouraged by politicians’ desires to guarantee the American Dream of a home to all Americans – regardless of their credit rating. Generous home loans were offered to people with little wealth or income, and therefore no realistic ability to actually pay them back. But with artificially depressed interest rates and the assumption that home prices would never cease to rise, it didn’t seem like such a bad idea. And with Uncle Sam implicitly guaranteeing to buy these risky mortgages from banks no matter what, subprime mortgage lending exploded.

Of course, we now know assumption that home prices would go up forever was wrong. Once home prices got overextended and started crashing back to earth, the party was over. And Uncle Sam (a.k.a. the American taxpayer) was left footing the bill – to the tune of over $400 billion with the Troubled Asset Relief Program (TARP).

It seems to now be happening all over again. This time politicians claim that a college education is part of the American Dream and is a right of all Americans – regardless of their credit rating and SAT scores. Spurred on by even lower interest rates and the implicit promise that John Q. Taxpayer will once again come to the rescue should anyone happen to default, we now have a growing student loan bubble on our hands.

Since 2003, student loan debt has more than quadrupled – rising from $250 billion to well over $1 trillion. It has increased over $500 billion (a 75% increase) since the beginning of President Obama’s first term, when it sat at $660 billion. Furthermore, at the end of 2008, the default rate was 7.9%, but now stands at 11.3% – a huge increase that is most assuredly an underestimation.
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