The next sub-prime crisis may be an educational lesson just a little too late


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By Ranjit Sidhu

In the US, commentators are now warning of the next group of loans that seem reckless and ready to collapse that could lead to the “the next financial crisis”.

Student-debt-cartoonHere are the figures:

• The size of this groups of loans is about to top $1 trillion ($1,000 billion) – it is a larger debt than credit cards in the US ($704 billion);

• The debt burden an American has taken on has more than doubled in the last five years, when credit card debt has actually dropped;

• The default rates for this group are 14.4%, with some sources putting the real default at closer to 25%, with the highest default rate being from those coming from those from low-income families.

The loans for this group are completely unsecured and are only based on the promise of future earnings.

So what is this latest consumerist throwaway good these profligate Americans are gorging themselves on at the risk of destroying not only their own, but their country’s future? An education.

The mix of federal and private student loans in the US have created “a bewildering maze of programs and options” (see Archibald, Robert B, 2002: Redesigning the Financial Aid System: Why Colleges and Universities Should Switch Roles with the Federal Government; Baltimore, MD: The Johns Hopkins University Press) whose combined debt has created a generation of “wage slaves”.

It has become a major matter of social strife as shown by it being a major grievance for the US Occupy Wall Street protestors with President Obama last October having to step in with promises of relief. However, if as widely suggested the interest rate on the federal provided loans is doubled by Congress on the July 1st, the fear is the system may go into a default meltdown.

 


See also:

University applications down nine per cent, more for mature students 30 Jan 2012

Legal loan sharks are licking their lips as the social fund is scrapped 26 Jan 2012

The government must not sell-out over Student Loans book 25 Jun 2010

New student loans chiefs must get a grip to avoid fresh crisis 26 May 2010

Loans chaos rounds off rotten week for students 19 Mar 2010


 

Now, wondering what the implications of the above are for our own education system here in the UK, well the comparision is truly frightening: the student loan burden now smothering the US student is calculated on average to be $25,250. With the changes the UK Coalition government has implemented it is estimated the average student in the UK will leave with a debt of £53,000 or $85,000 – three times as much.

It is not often we are given a window into the future, but the US education crisis gives us just that: if a country with a higher GDP per capita sees the student loans on its young as being unsustainable, how can we in the UK expect our young to carry potentially three times the load?

The cross party principles enshrined in the 1963 Robbins Report that government was to provide the structure so that university places “should be available to all who were qualified for them by ability and attainment” is being broken with the paradigm shift of education being seen simply as a personal commodity to be brought and is something we can regret at leisure.

That we pawned our (not perfect, but envied) university system for a commoditised education culture that will create unsustainable debt will be an educational lesson from the US that may reach us just a little too late.

 


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  • Anonymous

    Lets talk closer to home. Lets look at the UK government.

    The loans for the government are completely unsecured and are only based on the promise of future taxation.

    What are these loans?

    1. Gilts. Pretty obvious. 1.05 trillion and rising at 150 bn a year.

    2. Civil service pensions. I presume you aprove of them being paid. However,there is no difference between the liability and a debt. Passes the duck test. Looks the same. Waddles the same. Quacks the same.

    3. State pensions – ditto

    4. State second pensions – ditto

    5. Most of PFI – ditto

    How come the US is living dangerously? The UK government is fundamentaly suicidal in comparison. It’s popping the tablets, juggling the loaded guns, flaming swords, snotting coke, …

    Student debt? Peanuts.

    What about the government debt that those students have to pay off on top.

    225,000 compared to 30,000.

  • Anonymous

    Let’s not, let’s discuss the actual story. Oh wait, that would mean exposing your party’s sins.

    Blah blah PENSIONS EVIL.

  • Anonymous

    Not surprised you want to avoid the discussion.

    Funded pensions – good

    1. The pensioner isn’t exposed to the risk of the provider going bust. Hence the civil servants will lose most of their pensions, a la Greece.

    2. The investment is a real investment. It’s not ‘government investment’ or spending.

    Investments produce money, or save money. It’s not another word for spending.

    PS. The billions invested by Brown. Why exactly is there a deficit and a massive debt given the ‘investment’? It’s all gone Pete Tong.

    2. I don’t think you understand the Tories. They are just like Labour all for big government, lots of taxes, lots of spending.

  • Anonymous

    With the changes the UK Coalition government has implemented it is estimated the average student in the UK will leave with a debt of £53,000 or $85,000 – three times as much.

    ==============

    Well, either they pay it directly, or they pay it indirectly.

    So it is in their name and they pay it off, or it goes on the government debt, and they pay it off that way.

    You can’t magic the debt away.

  • Anonymous

    Yep, another mirror-discussion where you ignore the topic and go off on your usual tangent to try and stop sensible discussion, Tory troll

    And I get it, “PENSIONS BAD”. Right. Your stock portfolio needs more corporate welfare loving!

  • Anonymous

    Except one punishes most people for doing a degree and the other doesn’t.

    Punishment is what you’re about, of course.

  • Anonymous

    I’m not punishing anyone.

    Current the plan is tails the student loses by having to borrow, heads the government wins because it taxes them more if it works out.

    Either you self fund, but you aren’t taxed on the rewards, or the government funds, and then takes a big chunk of the rewards.

  • Anonymous

    Or you invest in the future of the country, like every other Western nation, bar the US.

    Nah, can’t be allowed.

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  • Mr. Sensible

    I agree Newsbot9. The right has to ask itself if we want our country to go forward or not.

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  • http://twitter.com/rssidhu Ranjit Sidhu

    Hi All,

    Thank you for your comments. Just a couple of points:
    LordBlagger: It is the unsecured nature of the debit which is worrying and the default rate. The sub-prime lending itself was not that large in $s it was that it was seen as credit worthy when they were not. Leveraging of that debt coupled with the differing financial instruments they can be wrapped into means that this debt can be a ticking time bomb – that is what 2008 financial crisis taught us.

    Whether the debt needs to be paid is not the point was not the point I was making here. It is that putting a debt of £50,000 on a 21 year old is something that aside from morally wrong is also financially dangerous for a society. Indeed Government, if it was long term in its aspect would take on the cost of educating a person in the knowledge that the benefit that would accrue to them will out way the payment over a lifetime. To illustrate; Vince Cable said that a graduate would on earn £100,000 more in a lifetime, how much extra tax to the government would that be? That function of government used to be called “social responsibility”, something I hope we learn again soon!

    Thanks again for your comment

    Ranjit

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  • http://twitter.com/faykellytuncay Repeal the Act!

    I think the point should be how can we make university cheaper or free. The excellent example of free online courses like Open Yale offer a way forward. The private sector could pay for top lectures to be given free for students in all subjects. With ICT and the internet a university education could be free to all those who wish to learn. We need to rethink how universities are organised to get costs down.

    See here http://oyc.yale.edu/courses

  • Anonymous

    The figure of 100k is disingenuous. It’s heavily skewed by people who go into the city and earn very , already attracts higher tax rates AND is a very low premium compared to other countries. Most people who do degrees under this regime will LOWER their lifetime earnings.

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  • Anonymous

    While some people can learn in a remote setting, especially for secondary qualifications, embracing it wholesale is a mistake. Moreover, under the Government plans even the Open University is having to charge large amounts for their courses – £5000 per year.

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