The Issue of Student Loans and Debt - Term Paper Example

Section/# The Issue Loans and Debt Economists and market analysts warn that the economic downturnwhich took place between 2007 and 2008 is but a harbinger of something much worse to come. Interestingly, rather than mortgage securities being the culprit of the hardship that these analysts indicate is fast approaching, they instead indicate that the true culprit will be a collapse of what they refer to as “the student loan bubble”. Within this student loan bubble, these analysts predict that the burgeoning rate of debt that is created each and every year or more and more students to pay for college education that they cannot afford creates a situation in which a slowed job market will be unable to absorb these individuals and provide the necessary debt payments that these loans necessitate. Accordingly, the rate of default during any future slowdown in economic growth could be so profound that these individuals will contribute to a secondary crisis that could be far worse than the mortgage-backed security crisis that took place during 2007/2008. Yet, rather than focusing an entire analysis upon the potential for hardship that exists due to the way in which student loans are managed and given out, the following analysis will specifically focus upon the way in which banks manage student loans, the potential for distress that this style of management creates, and the individual hardship that student loan/debt repayment creates for a recent graduate and their overall Outlook for earnings during their lifetime. It is the hope of this author that such a level of discussion will be beneficial with respect to engaging a further level of appreciation with regard to the issue of student loans, how they are managed, and how this form of debt impacts upon individuals within the current era. One of the most interesting ways in which the reader can come to appreciate the similarity between the mortgage-backed securities that contributed to the 2007/2008 financial hardship as compared to the issue of student loan debt creation and repayment has to do with the similarity of financial structure; specifically with regard to the way in which these student loans are packaged in bulk and sold within equity markets. In almost an identical manner to the way in which banks manage mortgage-backed securities and bought and sold these as an asset, the financial system is currently performing much the same process with respect to student loan debt. This is not a new concept. Instead, packaging debt and selling it to investors that place a premium upon whether or not the debt will be repaid and consider these securities as an asset has been engaged for many decades now. However, since the collapse of 2007/2008, it is clear and apparent that bundling these debts together and selling them as securities within the financial markets, and between bank to bank, is ultimately not something that serves the best interests of the financial market or the student themselves. From a more personal perspective, the hardship that is exhibited with regard to the student that is seeking to repay these loans, or indeed the recent graduate, has to do with the fact that these individuals are oftentimes unaware of the fact that there student loan debt have been bought and sold; sometimes multiple times throughout the life of the loan. Figure 1 illustrates the dramatic and near exponential growth of student loan debt over the past several years. Naturally, such information is not vital with regard to financial decisions that are made on the individual however, if they had been aware of the fact that their loan had changed hands, potentially multiple times, the incentive to refinance the loan and/or engage with other lenders that might see a lucrative advantage in servicing a new client might be increased. Figure 1 As anyone with a mortgage is intimately aware, marketing and advertisement to refinance the mortgage takes place over nearly every medium. Radio advertisements, junk mail, email, and even billboards advertise that refinancing a mortgage can save tens of thousands of dollars of the long run, reduce payments, and decrease the term of a specific loan. However, in terms of the way in which banks manage student loan debt, it is almost without exception that refinancing student loan debt is not regularly discussed as a means of saving money and benefiting the overall interests of the debtor. Although it is far from true that this oversight is likely to be the result of a broad conspiracy, the fact of the matter is that the lack of attention towards refinancing a student loan ultimately diminishes the utility of the borrower; as they are unable to infer whether or not they could achieve financial independence or profit from engaging with another lender and ultimately changing the terms of the loan that they currently have (Chambers, 2014). Perhaps the more relevant understanding based upon the way in which management of student loans takes place within banks and the lack of focus towards marketing is affected has to do with the fact that student loans have traditionally been rather small. However, as the cost of education is skyrocketed, these loans have ballooned to tens of thousands, many times hundreds of thousands, of dollars. As such, a level of reconsideration might well be an order with respect to the way in which banks manage and market student loan refinance packages and promote them within the media. The underlying rationale for selling student loan packages to another lender is not always based upon profitability alone. For instance, scholars indicate that there are many situations in which a loan maker immediately sells the loan once it has been agreed upon and enacted; due in part to the fact that the loan maker is not happy available infrastructure to service the loan throughout its lifetime. As such, this particular practice is not necessarily harmful to the system as a whole; due in part to the fact that such a structure only passes the loan to an institution that is willing and able to secure it throughout its lifetime. However, in the eventuality that loan packages are bought and sold a variety of its financial institutions and representing a litany of different statistics and individual risk, the chance of these coming to represent another bubble are ultimately causing catastrophic harm to the financial system is necessarily maximized. As was discussed briefly in the preceding section, even though a macro approach to student loan management is effective and more individual level of appreciation is ultimately what helps to define this particular market and help to understand what is likely to take place within the near future. Since the economic slowdown of 2007/2008, it has been clear and apparent that the labor market still struggles to recover; at least the same standpoint that it was prior to the collapse. However, within the same timeframe, it is clear and apparent, from any measurement, that the market for higher education has grown exponentially (Bedinger, 2014). Along with the overall market size and growth of demand for market education, the cost of this education has also skyrocketed. Whereas it was once possible for an individual to pay their way through college, such an eventuality is so far removed from current reality as to seem laughable. As a result of this dynamic shift, it is now necessary, if not required in almost every case, for the individual student to take out a sizable loan as a function of achieving a college degree. Prior understanding indicated that this particular investment was one that would pay off in the long run; as college graduates typically earn more money during the course of their career as compared to the money that could be learned or saved rather than going to college. However, since the crash of 2007/2008, labor markets have not yet recovered. Because of this, a glut of students are graduating each and every semester without adequate means of servicing the debt that they had incurred as a means of achieving a higher level of education. The impact that this has upon the individual graduate is complex and fell in a number of different areas. Firstly, within a macro view, the impact has to do with the fact that more and more individuals of a particularly young and educated demographic finding themselves unemployed. Secondary reality has to do with the fact that fewer and fewer firms are seeking to add new jobs as they are still fearful that a return of the conditions of 2007/2008 could become evident at any moment. Although there are a host of macro economic factors that contribute to this, monetary policy and the resiliency and solidity of the financial market is one of the greatest concerns. Returning to a more microeconomic perspective, even in the event that an individual is able to find gainful employment after college/university, they are immediately guaranteed a lower disposable income as compared to inflation adjusted salaries over the past several decades. The underlying reason for this has to do with the fact that prior generations did not find it necessary to begin repayment of a fairly substantial loan immediately upon landing their first full-time job. However, with the way in which student loans are structured and financial institutions expect the first payments to come soon after graduation, the overall degree and extent to which financial independence can be realized by the individual is dramatically decreased. Secondary microeconomic factor that this has is with respect to retirement planning and the means by which saving is accomplished (Bellin, 2014). Once again, as a diminished disposable income limits the amount of money that an individual can dedicate to specific tasks, retirement planning and investment falls far beyond the reach of most individuals shortly after college graduation. Further, as many scholars of indicated, this is one of the first generations, over the past hundred years, that has experienced a dramatically lower quality of life as compared to the previous generation. Once again, the hardship of student loan repayment is one of the reasons for why this is true; along with the fact that a horrendously terrible job market stymies the hopes and dreams of recent graduates. As more and more recent graduates suffer from unemployment, along with the heavy cost of student loan repayments, the risk of default is of course maximized; creating a situation in which the ultimate risk associated with student loan debt securities is increased beyond that which the market can adequately represent. Accordingly, the information that this paper has thus far represented has been concentric upon both the macro and micro impact of student loan management and what they portend for the very near future. Ultimately, the paper has thus far analyzed both the macro and micro economic impacts of the way in which student loan debt is managed by the banks and is engaged with by the debtor. Furthermore, the hardship of student loan debt repayment and the increased level to which it represents in terms of overall earning potential and debt to income ratio is not nearly as bothersome as is the continued malaise that is exhibited within the job market. If it is indeed the case that the labor market does not dramatically improve within the very near future, the overall rate of default and the risk that student loan securities will take within the market will likely mirror the risks that mortgage-backed securities exhibited leading up to 2007 and 2008. Although this is a dire outlook, as student loan averages continue to climb, the rate at which this bubble could impact upon the entire market is not something that should be ignored to my: instead, it is something that scholars and analysts must pay increasingly close attention to. As can be evidenced from recent political discussions, this particular threat is so severe that the federal government is considering action in terms of the way in which these loans are administered and the mechanisms by which repayment takes place. However, as such, no definitive changes have been noted in the system is largely represented in a similar way as it has been over the past several years. References Bedinger VI, G. (2014). Time for a Fresh Look at the "Undue Hardship" Bankruptcy Standard for Student Debtors. Iowa Law Review,99(4), 1817-1839. Bellin, J. (2014). A New Approach to Student Loans. National Affairs, 1973-86. Chambers, T. (2014). Death and Taxes: The Crushing Tax Burden After a Student Loan Is Discharged Due to Death of a Student.Minnesota Law Review, 98(5), 1917-1942. Read More