The Student Loan System is Dead. The Pandemic Killed it.

“…If a borrower’s spending increased during the pandemic, they should review their budgets to free up money to start making student loan payments. Cut back on discretionary expenses. Borrowers can also increase their income by asking for a raise, working a part-time job in the evening and weekends, or by switching to a better-paying job.”

Covid-induced splurging? This phenomeon may indeed plague the millionaires and billionaires who enjoyed breathtaking stimulus windfalls during the pandemic, but of the thousands of reports I’ve received from student loan borrowers about jacked up rent, lost jobs, closed businesses, reduced purchasing power, etc., this is definitely not a thing.

Forbes Headlines Before the Presidential Election, and More Recently

The student loan “apocalypse” has already happened- more than two years ago. The pandemic is the nail in it’s coffin. There is no saving this lending system, and there is no good reason to save it.

Before the pandemic, the Brookings Institute estimated that student loan defaults for the Class of 2004 would reach 40%. This is double the default rate for subprime home mortgages. These borrowers, however, were borrowing less than a third (roughly $13,000) of what is borrowed today (roughly $39,000). Wages have not tripled since 2004. They have flatlined with inflation, at best. Given this, it should not be controversial to say that defaults for all current student loan borrowers were going to be at least 60–70% (if not higher)…before the pandemic.

Source: Department of Education Loan Status Report
Source: U.S. Department of Education (Q4 2020)

A default rate 3–4 times higher than the subprime rate. Most borrowers not paying. 80% of all borrowers underwater. Older borrowers outnumbering younger borrowers, and owing far more despite having borrowed far less. All of these happening before the pandemic. This is indisputable, clinching evidence of a totally- catastrophically- failed lending system.

The 45 million borrowers have obviously inculcated this. They have had a chance to reflect on the debt. They’ve seen trillions in economic stimulus (including $1 Trillion in PPP loans that don’t need to be repaid)thrown out to the country. Much of this stimulus has gone to millionaires, billionaires, and even colleges, who have never been in a stronger financial position than they are right now. All of these giveaways added to the national debt, and required money to be printed, or drawn from the Treasury. Federal student loans, on the other hand, can be cancelled without drawing even a penny from the Treasury or adding even a dime to the national debt.

Trying to turn Federal Student Loans back on.

Federal student loans are, for better or worse, vanishing into a mist of illegitimacy, and time only hardens this popular rejection. There is literally nothing that can be done to change this fact.

Lending systems fail from time to time. This has been true dating back to biblical times, and continues to be true to the present day. In the mid-eighties, for example, the S&L crisis saw the failure of a third of U.S. Savings and Loan Institutions, and the dissolution of the Federal Savings and Loan Insurance Corporation (FSLIC). More recently, the aforementioned Subprime Mortgage Crisis nearly took down the entire world economy.

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