Student loans: America's next financial crisis

The housing crisis continues to churn through communities around the United States, and after a relatively brief lull induced by the "robo-signing" scandal, foreclosure rates are projected by Fitch Ratings to surge upwards in the next year. The housing crisis, which precipitated the 2008 financial collapse, is now fairly widely understood, and numerous government programs have targeted the problem and tried to mitigate the damage.

The problem of rising and unsustainable student loan debt , by contrast, remains largely unacknowledged by the powers that be, though it's a vital cause to many protesters in the Occupy movement.

A recent report from the New York Fed found that in Q3, total consumer debt dipped slightly, falling $60 billion to $1,166 billion. Delinquency increased, however, rising from 9.8 percent of total debt to 10 percent or around $1,200 billion worth.

More significantly, a new measure of outstanding student loans found that while the aggregate Q2 figure for student loans originally stood at $550 billion, the revised figure should actually have been $845 billion. In Q3, that ticked up anoher $20 billion. Though it's still dwarfed by mortgage debt as a share of total consumer debt (7 percent for student loans versus 72 percent for mortgages), it remains the largest non-mortgage piece of the total American debt pie.

Student loans, because they are taken out to pay for education, an intangible, cannot be discharged in default. Furthermore, they're largely insured by the federal government, which means even a mass-default protest - like the one proposed by some members of Occupy Wall Street - would hurt taxpayers more than creditors.

The standard argument is that student loans can't be dischargable, because there's nothing to secure them - you can't repossess someone's education. However, the financial industry has used its characteristic ingenuity to find a way around that - in effect, the collateral for student debt is now a lifetime of the debtor's labor, rendered via an unforgiving architecture of wage garnishings, penalties and a pervasive culture of shame.

Perhaps the most worrying part of this burgenoing crisis is that it's now understood that many, perhaps most, current students won't be able to pay down their loans. Making the rounds of the blogosphere today is a post by Ukrainian-born journalist Natalia Antonova, describing her futile efforts to escape the debt she owes to Sallie Mae ( SLM ).

However you feel about the industry, the culpability of students and the role played by the colleges themselves, it's frankly astonishing and appalling that a debtor could, as Antonova claims, pay $23,449 to a total obligation of $37,099 and end up, six years later, owing $35,908.31.

And the financiers know exactly what's happening. In a Wall Street Journal article from last month, a hedge fund manager with expertise in the $242 billion student loan-backed bondmarket (sound familiar?) said he refused to get involved with assets backed by recent student loans because he "can't quantify the risk ." The historical average for default rates figured on a quarter to a third of loans going bust, but another trader said that will probably rise to 40 percent or higher, depending on economic conditions.

Rising costs are one side of the coin. According to the College Board, tuition costs are set to continue shooting upwards. In-state tuition and fees at public four-year institutions were up by 8.3 percent at $8,244 per year in the 2011-12 year, while private tuition and fees rose 4.5 percent to $28,500.

On the other side of the coin is unemployment. Among the 16-24 year-old cohort, that now stands at 18 percent; for those 16-19, it's above 25 percent, with a participation rate of less than half. Young people can't get jobs before college, can barely find work during their school years and then face a terrifying job market upon graduation - if they graduate at all.

Only half of students who start 4-year bachelro's degree college program graduate within six years, according to Complete College America , and unemployment rates are twice as high for those who fail to graduate as for those who succeed.

The ingredients: nearly a trillion dollars of debt on the books, rising tuition costs, a youth employment market in crisis, undischargeable debt, government-guaranteed loans and an asset -backed bond market worth a quarter of a trillion dollars.

It doesn't take a college degree to see the potential for disaster here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.