Student loan bubble could start collapsing as banks stop loans

Is this just another signal that the student loan bubble is going to pop at any moment? It could be as JPMorgan Chase, one of the nation’s largest financial institutions, confirmed in a memorandum to colleges that it will cease making new student loans as of October.

Reuters initially reported on the notification and discovered that the reason why the United States bank is refraining from establishing new student loans is because executives don’t think it can substantially grow the market. It isn’t the first private outlet to stop handing out loans as U.S. Bancorp exited the market last year.

It should be noted that approximately $8 billion in private student loans are in default, which is expected to inch higher as interest rates rise, according to the Consumer Finance Protection Board (CFPB).

Another troubling sign is that this is quite reminiscent to what transpired prior to the subprime mortgage meltdown in 2007. At the time, financial institutions continued to end its subprime unit and had delivered the news similar to the way JPMorgan Chase announced it was ending its student loan business.

Here are two statements made in 2007:

“It’s no longer sustainable and not the right place to allocate capital in the future,” said HSBC Holdings Group Chief Executive Michael Geoghegan.

“Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space,” the company stated in a press release.

Presently, the U.S. maintains more than $1 trillion in outstanding student loan debt, which makes it the largest non-mortgage household debt contributor in the country – a decade ago that figure stood at $240 billion. But in an era of low interest rates, the increase in the size of government and the expansion of post-secondary institutions, it was inevitable the Federal Reserve and the federal government would produce yet another bubble.

One last note: 11 percent of student loans are at least 90 days late, a number that persistently grows each quarter.

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  1. Emily Morgan says:

    This is another example of government affecting prices and messing up the market. If the gov’t wasn’t involved in student loans, banks would charge much higher interest rates to offset default risk. The increased cost of the loans would cause many young people to look outside of the traditional 4-year college path. That would in turn cause colleges to have to be more competitive on pricing. When you look at interest rates on student loans compared to actual default rates and interest on services offered by, it doesn’t add up.

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