Nobody wants to admit they might be screwed.
In the last stagnated economy, the American Dream was preached to the masses: everyone was entitled to home ownership. We were encouraged to borrow the money because real estate was the greatest investment on the planet.
Amid efforts to stimulate ourselves out of the current stagnated economy, the American Dream was preached again: telling us that everyone was entitled to a college education. That in fact, we should borrow the money because a college education is the greatest investment on the planet.
You Get an Education, and You Get an Education!
The similarities are startling. The Countrywide commercials have been replaced with University of Phoenix ads to sign up for classes. The subprime borrowers are replaced by for-profit and community college student borrowers. Sallie Mae became Freddie & Fannie, where investors assumed zero risk since the government promised repayment.
Think about it for a moment – people want to feel as if they are bettering themselves, making an investment towards their future. It is ingrained in these borrowers that education will payoff for them in the long run.
The average human is not a rational economic actor. Many of us make extremely incompetent decisions with free money. As Vinny Daniel in the Big Short put it, “How do you make poor people feel wealthy when wages are stagnated? Give them cheap loans.”
Student loan borrowers have been able to hide in delinquency and forbearance for the last few years, letting the debt balloon to a whopping $1.5 trillion. Even though that’s just a fraction of the mortgage market, it still carries a measure of brevity.
Most of these borrowers have accumulated a large amount of debt at a young age and have barely any prospects moving forward. it’s highly unlikely that these bonds will be repaid at maturity. In the end, it will be up to the taxpayer to come in and repay the debt.
How Did It Come To This?
Most people tend to look at online schools like the University of Phoenix and their owners Apollo Education as the main culprits. But they are not the head of the snake.
It’s actually a toxic mixture of the Department of Education and Sallie Mae’s collections arm Navient Corp. Navient themselves are massively over-leveraged with $130 billion of liabilities that are among the most misunderstood in the market.
The root of the problem begins with the Department of Education which started incentivizing the loan servicer so that they can recover more delinquent funds. However, it turns out that servicers can make 30 times the profit by allowing loans to go into default and then recovering them. This allowed servicers to originate federal loans without checking the credit-worthiness of the borrower.
Just to look at for-profit colleges, they only account for 12% of enrollment but students at those schools have accumulated $280 billion of debt. The fact is these schools are nothing more than degree mills that target vulnerable borrowers who lack any formal education.
The majority of Navient’s bottom line comes not from debt servicing from default collection. When a borrower goes into delinquency, Navient gets paid a percentage of every dollar that it collects instead of a small fixed-fee. This contributes to how good they are at collecting the debt from their 12 million customers. Cue the incessant calls at all times of day, and the endless manipulations from agents looking to enroll borrowers in programs.
The Bill Comes Due
The problem here is not Navient’s questionable business practices, it’s more the inaction on the part of the Department of Education. The regulatory landscape is changing, but the rate of growth of the student loan problem might outpace it. The question isn’t if Navient will pay a penalty, the question is when.
