The Next Big Short
By 2023, the average BA grad's debt load will exceed his or her annual wages.
This is a terrifying statistic. More terrifying, however, are the trickle-down effects of a generation who can't get ahead. As many people well know, when every available dollar goes toward paying a minimum monthly debt balance, everything else gets put on the back burner. Buying a car. Buying a home. Going on vacation. Getting married. Everyday indulgences suffer, too. Shopping. Going out to dinner. Seeing a movie. Milestones move back, stress levels move up and it appears there is no light at the end of the tunnel.
This paints a dire picture indeed, one that should be front and center on Capitol Hill and in the news -- with real discussion about how to prevent what can be justifiably labeled "the next bubble burst".
Of course, within misery often lies opportunity. For those of you wondering how to capitalize on the trend, look to Flowpoint Capital Partners' Charlie Trafton. He and other equities traders are getting in on the act with a group of stocks that represent the business end of the American collegiate system, from debt collectors and loan servicers to textbook publishers and student housing builders.
“Nobody has done more to destroy the middle-class dream than the [cost of] American college,” Trafton contends. “But once this bond market breaks, colleges aren’t going to be able to raise tuition, and that’s going to hit a variety of businesses.”
How did we get here?
You may be wondering what caused the student debt crisis in the first place. According to this student loan debt forgiveness site, there are three specific pieces of legislation that spelled certain doom for ordinary Americans buried by student loan debt:
The 1978 Bankruptcy Reform Act – This act was passed to prevent students from being able to file bankruptcy on their student loans within the first years of graduating from school. Passing this law turned student loans into a well-protected product that allowed lenders to be far more lenient about who they gave money to, including people who previously seemed to risky to lend to, because the law protected them from having those borrowers default quickly, and avoid paying back any of the money that they had borrowed.
The 1990 Update to the Bankruptcy Reform Act – This change to the previous Bankruptcy Reform Act extended the time period banning Federal Student Loan Bankruptcy Discharges from 5 years post-graduation to 7 years post-graduation, making borrowers suffer through two additional years of repayment before they were able to attempt to discharge their debt via bankruptcy proceedings. Once again, it helped the student loan lenders and servicing companies at the expense of ordinary Americans.
The 1998 Higher Education Amendments – President Bill Clinton modified Federal student loan bankruptcy laws once more to extend the no-bankruptcy discharge period indefinitely, meaning that loans could never be discharge via Bankruptcy no longer how long the borrower had been struggling with them, unless they could prove that they were facing an “Undue Hardship” because of the debt, which requires claiming that the loans are literally threatening their ability to cover essential costs (like Food, Housing, Healthcare, etc.) .
Now, I'm sure myriad arguments exist as to whether this list is accurate, or has missing information, or stems from a jaded source, and so on and so forth. The point here is this: for reasons largely beyond our scope of control, the American people are accumulating unprecedented debt in the name of education -- an education they believe will get them a job. The problem is, the education-begets-job certitude is in decline due to a skills mismatch between classroom and job market. This leads to underemployment (or in some cases, prolonged unemployment) which leads to a longer runway to advance and grow wealth.
One might reasonably expect that -- given the catastrophic aftermath of the mortgage collapse -- educational institutions, banks, regulators and other governing bodies will have a fair amount of concern over again-soaring debt levels.
In the meantime, it will behoove the American people -- to the extent possible -- to enter into fields with known job demand (such as caregiving and operations management). In the years to come, we will need to look at an entire revamp of our structures -- educational, vocational, financial, degree and certification requirements and the hiring process itself -- to design a brighter future for tomorrow's generations.
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