Nobody knows when the student debt bubble will burst-But we at least know how.

 

That’s right. In 2009 congress couldn’t come up with an agreement on how to finance federal student debt. So what did they decide to do? Punt. Congress defaulted to option they would use if an agreement couldn’t be made. That default option-all loans are hitched to a 10 year treasury note. These 10 year treasury bonds reset annually. Just like those adjustable rate mortgages that caused the housing crisis.

Since 2009 we have been coddled with historically low interest rates. People can argue on how or how long those interest rate will stay low. But one this is for sure-They will eventually rise. As Warren Buffet has  said, “It is difficult to determine when something is going to happen. But someone can much easier determine what is going to happen”.

Defaults on loan debt is currently around 11.2% with still historically low interest rates. So it is not not hard to determine what will happen when the 10 year yield finds itself around 4 or 5 percent. Unfortunately, defaults will go through the roof.

  • Total Federal student loan debt is $1.5T
  • Credit card debt in the US is $1T
  • Student loan debt is double than the national defense budget.
  • Average student loan debt after graduation is around $32,000.

Well then perhaps we should make college free!? While college is free in other countries like Germany-that won’t solve the problem. The first thing that we have to do is fix our definition of what “college” is. College in the US is vastly different than college in Germany. In the US we build massive coliseum’s for sports teams. Its almost a four year fantasy land of binge drinking and debauchery with team pride.

Perhaps this is the reason why a Non EU member  can attend college in Germany for $3,500 per year on average. The cost of an out of state student to attend a public university on average is $25,000. College in the US is seven times more expensive!

This is essentially the same thing as everyone in Japan receiving a free Honda civic with an MSRP of $19,500. Then everyone in the US getting jealous demanding a free car. Except we demand a car that is worth $140,000!

 

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