Wednesday, October 01, 2008

Blood, sweat and tear prices dropping drastically

Student loan bailout? by Alan Collinge

Of course, it'll be the lenders that get bailed out, not the debtors. Hey, someone's gotta look out for poor Albert Lord of Sallie Mae; yachts don't refuel and maintain themselves, you thoughtless bastards!

Why would student loan companies need a bailout? It's not like student loans are backed by mortgages on homes who's values go down - they're backed by the sweat, blood, and tears, of graduates without the parental assets to pay for school - so they are safe, right?

No. Because the values of graduates' blood, sweat and tears are going down. Wise financial management counsels people to spend only 10-12% of their incomes on debt repayment. In the past ten years, as income stagnated, tuition went up by nearly a third. With an economy in depression, and graduates unable to earn an income sufficient to repay record levels of debt, default rates will continue to rise. Already, for those with over $15,000 in debt - and the median debt load for graduating seniors is over $17,000 - the default rate is 1 in 5. That default rate is so bad, it makes mortgage-backed securities look like a safe investment.

The student loan and mortgage problems are fundamentally the same: metastasizing debt outstripping the ability of debtors to pay. (There's another similarity in that the prices of the underlying asset, degrees and houses, were irrationally inflated.)

So now that the bailout has passed, Sallie Mae and others are sure to stick their snouts in the trough.

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