Why the student loan crisis could be worse than the subprime mortgage catastrophe

Are young professionals who can't pay walking straight into debtor's prison?
SEP 09, 2014
With student loan debt officially reaching the trillions, the U.S. Executive Branch, the Consumer Financial Protection Bureau and the general public are worried about the effect of this massive debt on the American economy — and they should be. This marketplace propels itself forward by issuing more and more student loans, both federal and private, that lead to ever-increasing tuition costs and, in turn, a higher risk that student borrowers will be unable to satisfy their debt. I often see this crisis compared to that of the 2008 subprime mortgage meltdown, but the truth is the student loan crisis has the potential to be far worse. (Don't miss: 8 secrets advisers used to pay for their kids' college) Because the majority of these loans are non-dischargeable in bankruptcy court, these students have walked straight into a debtor's prison — a prison fortified with the long-term trend of tuitions rising faster than inflation, lowering employment rates for graduates and stagnant real wage growth. It goes unsaid that these combined factors carry severe macro-economic implications, as President Barack Obama implied when he announced a student loan relief plan expected to affect 5 million borrowers. While the plan will help alleviate debtor pain in the short term, the long-term implications could cause future students to believe that student loan debt can be taken lightly, leading to even more loans issued and, in turn, higher tuitions due to inelastic demand. Instead of limiting relief to short-term subsidies, I believe that holistic financial planning would provide more benefits in the long term. Indebted young professionals require an integrated approach that addresses both assets and liabilities, focusing specifically on the critical decisions and strategies that will have the greatest financial impact. Provide advice and support to minimize the cost of student loan debt, increase liquidity through payment relief as needed and save clients time so they can focus on their careers are critical. On the other side of the balance sheet, students need help determining if they are in a position to utilize discretionary funds for investments, savings or paying down premium debts. (Related: New admissions secrets of top colleges) It is disingenuous to compare student loans in aggregate to other securitized products, such as subprime or credit card debt, because there are vastly different categories within this asset class, from federal loans to floating rate private loans to fixed rate consolidation loans. They are also made up of very different types of borrowers. The only comparison I could draw to the subprime crisis is the borrower behavior in that the vast majority of borrowers still view this as an easy way to finance education without fully understanding the potential return on investment (or lack thereof). John Collins is the managing director of GL Advisor, a Boston-based financial advisory firm that addresses the needs of young professionals with advanced degrees.

Latest News

The average retiree is facing $173K in health care costs, Fidelity says
The average retiree is facing $173K in health care costs, Fidelity says

Research reveals a 4% year-on-year increase in expenses that one in five Americans, including one-quarter of Gen Xers, say they have not planned for.

Advisor moves: NY-based Coastline wealth adds three teams with over $430M in assets
Advisor moves: NY-based Coastline wealth adds three teams with over $430M in assets

Raymond James also lured another ex-Edward Jones advisor in South Carolina, while LPL welcomed a mother-and-son team from Edward Jones and Thrivent.

Fintech bytes: Vestwell comes through for underserved savers with multilingual support
Fintech bytes: Vestwell comes through for underserved savers with multilingual support

MyVest and Vestmark have also unveiled strategic partnerships aimed at helping advisors and RIAs bring personalization to more clients.

UBS profit beats estimates as Ermotti sees brighter outlook
UBS profit beats estimates as Ermotti sees brighter outlook

Wealth management unit sees inflows of $23 billion.

Evercore to buy advisory firm Robey Warshaw for $196 million
Evercore to buy advisory firm Robey Warshaw for $196 million

Deal will give US investment bank a foothold in lucrative European market.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.