When even banks flee from college loans

by hexacoto

From CNBC:

The largest bank in the United States will stop making student loans in a few weeks.

Even banks, who have been known to fish around troubled waters for revenue, such as with mortgage-backed securities during the subprime mortgage crisis, are pulling out of providing further loans to college students who want to take out a loan.

Why? Because college tuition is mounting, and as college students take out more loans to be able to afford that, only to graduate into joblessness or low-paying jobs that are insufficient for them to service their repayments, many default on their loans, causing banks losses.

I bet the student loan sector is so dismal that even the most creative of banks cannot re-package it into a lucrative derivative product. Unless the investors are really that daft.

With over $1 trillion in outstanding loans, the second highest in the country, over $8 billion in default, and about 13% of payers defaulting within  three years of servicing their loan, no wonder JP Morgan Chase wants out of this rapidly-collapsing market.

And of course, loans from JP Mogan Chase are a variable prime rate subject to market forces, unlike federal loans, and should interest rates go up, more students are likely to default and less students will be willing to take these loans out.

It is not so much that the jobs students are taking are less capable of living a standard life than they were decades ago; job wage increment has been slight but at least still barely keeping with inflation (2-3% wage increase vs 2-3% inflation) in the past two years. Compare that with tuition increase in the past two years, which has increased by 4-5%, plus state funding for colleges have fallen 15% in the past six years.

The problem is most definitely with the free-wheeling increase of tuition costs with no seeming checks. I have written about this previously and how if we are to maintain the momentum of development and progress in the country, something must be done to the incendiary college side of rapidly rising tuition costs, rather than just working on the palliative side of the solution of providing more government aid.

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