This has been coming for a long time. I know because I am on the front lines of the financial crisis every day and the student loan debt situation has all the same characteristics of the housing bubble. Fraudulent lenders and complicit borrowers.
Before the housing market collapsed, I had people asking me to file bankruptcy for them to protect their home from foreclosure. When we began to dig deeper into their financial situation (income, expenses, debts) it became clear that there was absolutely no way the homeowner could have qualified for a mortgage absent some creative paperwork on the part of the mortgage broker. It seemed inconceivable that a family of 4 living on $3,000 per month in net salary could afford a house payment of $3,500 per month and still keep up their car payments, utilities, insurance, etc. (true story).
And before anyone starts to say I’m whitewashing the homeowners’ complicit behavior, I freely admit that the homeowners shared some of the responsibility. Bad money management skills made homeowners opt to ignore their monthly budget and in some cases, the homeowners had no clue what their monthly income and expenses even were. Mortgage brokers told the potential homeowners that they qualified for a mortgage amount of up to 3 times their yearly salary. The potential homeowner, on the other hand, heard that they could afford a mortgage amount of up to 3 times their yearly salary. It’s not hard to see what would happen next. House payment defaults, car payment defaults and foreclosure.
Fast forward to the present. Over the past two years I am seeing more and more students with an unbelievable amount of student loan debt. For those of you who have followed my blog, you know I am a proponent of the One Year Salary Rule. You should never borrow more in student loans than the amount of your starting year salary. Yet, I continue to see students with student loan debt the amount of a jumbo mortgage but with only a measly 4 year degree to pay for it. We all know that the majority of the jumbo student loan borrowers are not necessarily using the student loans for books and tuition. The government and the schools will allow you to borrow more than the tuition and book costs with the expectation that the money will be used for an “educational purpose”. Is a laptop an “educational purpose”. Of course. What about rent? Well, you have to have a place to live while in school, right? What about a car? Mmmm…I guess you need a way TO school. What about a new wardrobe? Furniture for your new pad? It seems that the government is giving money away with no consideration of the student’s ability to repay the loans. Colleges and universities are raising tuition because there appears to be no end in sight for the amount of money a student can borrow. Some “for profit” colleges charge as much as a traditional university, but yet most don’t even have a job placement center to put the students to work after graduation.
Where are the school counselors? The parents? The regulations? These will be the questions everyone will be asking when the student loan debts hit the fan.