Is the West Facing Another Financial Crisis?
By: Joshua Cunningham
The aftershocks of the 2008 US housing crisis are still rumbling in economists’ memories as they look at the next crisis that could devastate the global economy: student loans. Student loans have risen from 7.2 trillion USD in 2003 to 12 trillion USD in 2017 which is similar to the modest growth housing debt saw in the same amount of time. Ultimately the housing crisis occurred because from 2003 to 2007, financial lenders were introducing hazardous practices that allowed the borrowers to take on more debt that than they could afford. When housing prices exploded, the market-bubble burst, leading to defaults on loans and forcing people to file for bankruptcy. There was a deficit of homeowners paying back their debts, causing a market-wide collapse since the U.S. debt was outsourced. The student loan crisis is following a similar path to the housing crisis. However, in the case of student loans, the United States government holds an estimated $1.4 trillion dollars of the debt—due in part to U.S. loans being issued through the government. With the U.S. government holding a significant percentage of the debt, all taxpayers hold a stake in the crisis.
Oversaturated Job Markets
A developing problem in North America is the purging of a skilled labor workforce in favor of white collar ‘promises.’ Over the last few years, there has been a significant increase in students pursuing degrees that promise higher pay scales and fantastic benefits. The top five popular collegiate fields of studies include computer science, communications, Political Science, Business, Biology, and economics. The result of the drive towards white collar industries is an over saturation of those respective job markets. In other words, there are a lot of qualified graduates who are competing for a small number of open positions.
The hyper-abundance of qualified candidates has allowed companies to demand a lot from their workforce. For instance, the Seattle branch of Amazon demands that their employees work ten hours a day for six days a week. Amazon justifies their work schedule by reminding their employees that there are hundreds, if not thousands, of qualified individuals who will be willing to work Amazon’s hours. It is no surprise that Amazon has a high employee turnover rate—usually around three months. As for other white-collar industries—business, nursing, law—the overabundance of qualified applicants results in a lower percentage of job placement after students graduate. The abundant pools of applicants also mean that employers are lowering their benefit and pay scale packages to new employees.
The difficulty of job placement combined with lower pay scales proves to be troublesome for graduates with student loan debts with accruing interest rates. When job placement fails and loan interests add to the burden of debt, some families seek other avenues for repayment: borrowing against their homes. Economists Gene Amromin, Janice Eberly, and John Mandragon presented a paper at the 2016 American Economic Association that mapped out an imposing problem with the student loan crisis. The paper illuminated the correlation between the change in home prices and how it affected homeowners needing to borrow against their homes to fund their children’s education. The inability to repay loans off of their homes proved to be a challenge to homeowners financing their children’s education. The failure to repay is due in part to the 2008 housing market deflation that lowered the value of U.S. property values.
A response to the plausible crisis created by student loans is to build infrastructures that will facilitate repayment of outstanding debts while preventing predatory practices from companies and governments who will try to take advantage of the situation. Senator Eloise Vitelli of Maine submitted a bill that would establish a student loan bill of rights to license and regulate student loan services—the bill was vetoed. The Senator’s bill was a response to the National Association of Realtors who show that the student loan issue is adversely affecting the housing market. Student loans are keeping individuals from purchasing property or houses. The bill would have also prevented student loan intermediaries from intentionally misleading individuals from the information needed to lower their payments. The misinformation only adds to the existing anxieties created by U.S. debt collectors demanding repayment within six months of graduation.
The Reality of the Crisis
The student loan crisis will follow the 2008 U.S. housing crisis if a large percentage of those in debt default on their payments. Although, student loans are not expunged by filing for bankruptcy—it is with you until you entirely pay off the debt. There does not seem to be any nefarious restructuring of debt which is sold to foreign investors—though; the U.S. government is holding the bill of debt. The U.S. government can garnish your wages from your W-2, take from your federal tax return, social security, and even file lawsuits against those with outstanding student loans. In other words, the burden falls solely on that in-debt. Currently, President Trump is proposing a constriction on the criteria that students can use for filing for student loan forgiveness.
Is the student loan crisis a real threat to U.S. markets? A leading expert on the student loan crisis was Drew Cloud—a name that has appeared as a credible source for the Washington Post, Fortune magazine, and CNBC. Recently, it was published that Drew Cloud was not a real person. The exposition occurred after the chronicle of higher education tried to meet him in person after Cloud published an article that claimed students were buying bitcoins with their loans. The founder of Pollfish—an online based survey site—was exposed to be a pseudonym for the conglomerate LendEDU. The conglomerate is an online platform that helps student loan borrowers apply to refinance their loans. The Drew Cloud fiasco illuminates that a real problem facing the student loan crisis is the finding of credible and accurate sources. The consumer and borrowers require unadulterated data to inform our decisions in regards to the student loan crisis. There are predatory groups out there who manipulate their data to invoke anxiety to their audience to gain clients. These nefarious practices only distort the public’s perception of the issue further—a distortion that could cause a more significant crash or deflation than expected.