The Federal Reserve Will Be the Piggy Bank for Student Loan Bubble

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The housing bubble burst when the house of cards built by reckless lending practices and an out of control derivative market came crashing down. The Federal Reserve drove interest rates down, while banks came up with creative financing methods to fund sub-prime mortgages that would otherwise not be safe investments. When it all crashed, the taxpayers picked up the bill, not the banks. 

Now that unlimited and unsecured student loan debt has become non-dischargeable, banks are lending money to students without healthy underwriting standards because the “debt jail cell for life” provision creates a safety net for the banks.

Not too long ago, student loans were made to a students’ parents, or had a guarantee so that there were some assets as collateral on the loan. But banks don’t want to require credit qualifications and collateral because it reduces the pool of people they can lend to.

And with students unable to discharge debt, who cares, we’ll get paid sometime, right?

Now, Elizabeth Warren is calling on the Federal Reserve to extend lower interest rates to student loan debt, creating an even greater incentive and opportunity for banks to lend money to otherwise un-creditworthy students. At some point, the bubble will burst. We will have an entire class of Americans saddled with debt that they can’t pay nor discharge through bankruptcy.

Obama wants payment assistance. Warren wants to lend free money. I wonder who will pick up the bill this time.

This discussion from the Wall Street Journal is worth watching: