A New Subprime Crises, Spurred by Educational Loans

Barry Lenson

“Subprime Goes to College,” an article by Steve Eisman in The New York Post last week, makes for explosive reading. We’d urge you to CLICK HERE to read every word, because it predicts an upcoming American financial crisis that could rival the subprime mortgage meltdown.

This time, however, the collapse will not be caused by over-borrowing on mortgages, but on educational loans. It will be triggered mostly by defaults on Title IV government loans that students are pressured to take at for-profit universities and training schools.

“The for-profit industry has grown at an extreme and unusual rate,” Eisman writes, “driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper . . . If nothing is done, then we are on the cusp of a new social disaster. If present trends continue, over the next 10 years almost $500 billion of Title IV loans will have been funneled to this industry. We estimate total defaults of $275 billion, and because of fees associated with defaults, for-profit students will owe $330 billion on defaulted loans over the next 10 years.”

This article offers further evidence that American higher education is boiling toward a crisis. Who is to blame? Apparently, a government that has been looking the other way while for-profit universities and training schools have been raiding the treasury.

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