There are now more student loans outstanding than there were subprime loans at the height of the housing bubble. And just like those subprime loans, student loan repayment rates are faltering. From Simon Black at internationalman.com:
In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond.
The idea was revolutionary.
The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors.
The idea caught on, and pretty soon, everyone was doing it.
As Bethany McLean and Joe Nocera describe in their excellent history of the financial crisis (All the Devils are Here), the first subprime bubble hit in the 1990s.
Early subprime lenders like First Alliance Mortgage Company (FAMCO) had spent years making aggressive loans to people with bad credit, and eventually the consequences caught up with them.
FAMCO declared bankruptcy in 2000, and many of its competitors went bust as well.
Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist.
But it didn’t take very long for the madness to start again.
By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned.
Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny.
It was madness.
By 2007, the total value of these subprime loans hit a whopping $1.3 trillion. Remember that number.
And of course, we know what happened the next year: the entire financial system came crashing down.
Duh. It turned out that making $1.3 trillion worth of idiotic loans wasn’t such a good idea.
By 2009, 50% of those subprime mortgages were “underwater”, meaning that borrowers owed more money on the mortgage than the home was worth.
To continue reading: This new bubble is even bigger than the subprime fiasco