Thursday, September 5, 2013

The Student Loan Bubble Is Starting To Burst

By John Carney

The largest bank in the United States will stop making student loans in a few weeks.

JPMorgan Chase has sent a memorandum to colleges notifying them that the bank will stop making new student loans in October, according to Reuters.
The official reason is quite bland.
"We just don't see this as a market that we can significantly grow," the marvelously-named Thasunda Duckett tells Reuters. Duckett is the chief executive for auto and student loans at Chase, which means she's basically delivering the news that a large part of her business is getting closed down.

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.

"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.

"Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space," the press release issued in August 2007 said.

There is over $1 trillion in outstanding student loans, making it the second largest source of household debt after mortgages. Just 10 years ago, student loans stood at $240 billion. About $150 billion of the total is comprised of private student loans made by banks and other financial institutions, according to a report issued by the Consumer Finance Protection Bureau last year.

Read the rest here.

(Note: Carney goes on to discuss exposure to student loans, but this exposure is different from mortgage exposure. Before the housing crash, new money was  needed to flow in the real estate sector to support that market, when it didn't it hurt those holding mortgages. This won't be the case for those holding student loans. Some may default and others may not, but the slowdown in flow of money to the sector will hurt colleges and universities that count on that money to support student payments, not necessarily students holding such loans.. In other words, the loan bubble will hurt the higher education industry.)


  1. These days with education costs, lower wages, and uncertain employment futures the cost of getting a job in the first place outweighs the benefits received from doing a job once one does have it. The education system should rot.

  2. Given this administration, I wouldn't go near education loans with an eleven foot pole. You might have your loans "nationalized" in the name of social justice or national priorities.