Bankers’ Hours column: Student loan for a mortgage payment
A funny thing happened on the way to writing this piece. A couple of weeks ago, I wrote a column comparing the financial crisis of 2008 and the current COVID-19 crash. As you might imagine, it’s kind of a complex subject. After far too many words, I realized that a comprehensive comparison will be the subject of 1,000-page door-stoppers for the next 50 years or so.
But just to be sure that a gem in the rough wouldn’t end up hidden in the digital depths of my laptop, I submitted the effort to the Bankers’ Hours independent editorial review board (IERB), for an in-depth vetting.
My wife said, “I don’t get it.”
So I took that as a hint to cut the word count, and set out to do a piece on the imminent end to the mortgage forbearance provision of the CARES Act. However, a diversion arose.
A recent Wall Street Journal article on that subject and the possible effects of its end, told of the situation of a married couple, both professionals in the human service field, who won’t be able to resume payments on their mortgage because the wife has been unable to return to work in her field, due to certain circumstance unique to her. Commendably, they want to keep their home and, according to the Journal, they’ve hit upon a creative solution to handle the house payments. She’s a graduate student, so … she plans get student loans to pay the mortgage.
I thought there might be a story there, and there is. The price tag of the projected student loan defaults over the current outstanding life of the debt is $435 billion. In the 2008 meltdown, private lenders were hit with $535 billion in losses on subprime mortgages. Fannie Mae and Freddie Mac were on the hook for a lot more.
Now keep in mind that the ultimate guarantor of the student loan debt is …
Yup, you. The American taxpayer.
It’s a big number by any reckoning. And there’s a significant difference between the subprime mortgage crash and the smoldering crisis in student loans. In 2008, every bad, inflated home loan had collateral securing the debt: a real house, built on real land. When the bubble burst, the mortgages were underwater, but the homes slowly, and then at a substantially accelerated rate, increased in value.
There’s no collateral for a student loan, except the borrower’s future earning potential. Unfortunately, the program is structured so that it effectively stacks the deck against most borrowers; the system’s creators and administrators couldn’t have done a better job of rigging the rules to assure that borrowers would struggle to service the debt.
Here are some stats: On average, 20% of a borrower’s disposable income goes to the education loan. That payment trails only the obligation for shelter, either mortgage payment or rent; the average loan size is $26,495, with a payment of $579 per month.
How did this happen? It’s simple. No esoteric financial algorithms here. These loans are made with virtually no underwriting guidelines, especially as to ability to repay. We can accept that it’s tough to base a loan on a student’s current income, because there may be none. But the whole idea, from an economic perspective, is to educate a future wage earner to maximize earning potential. So probability of future income to service debt should be factored into the loan approval. It isn’t. It’s easy money to borrow, and hardly anyone, including borrowers, analyze how it’ll be paid back.
Higher education was apparently quick to get aboard the gravy train. Because they can, colleges and universities have been cranking up tuition at a much faster rate than the increase in wages. Also, there’s a feature that allows you to pile on more debt to get more educated. Graduate students can borrow more, with fewer restrictions, than lowly undergrads. By the time you get that Ph.D., it better be in a lucrative field, or you’ll be paying the money back with Social Security. Great for the professors, deans and chancellors — not so good for the rest of us.
Not all degrees have the same earning power. A doctorate in philosophy doesn’t carry the same economic clout as a degree in medicine. Nothing against historians or philosophers — heaven knows we could do with leaders that have read books, or even one —but loan amounts should be based on the probability of future income.
As for the numbers relating to the Mortgage Meltdown: The aggregate dollar amount in 2008 exceeded, by a lot, the projected student loan default. Fannie and Freddie were bankrupt and became the property of the taxpayers. Now the two enterprises have repaid the Treasury and are solvent with healthy earnings. That’s because the bad mortgages they guaranteed then have been replaced by good loans that are secured by many of the same properties that were foreclosed between 2008 and 2010. Collateral was the fulcrum for recovery.
You can’t foreclose on a brain, and …
A mind is a terrible thing to chase.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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