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Student Loans A Lot Like The Subprime Mortgage Debacle, Watchdog Says

Dec 9, 2019
Originally published on December 10, 2019 10:39 am

Mike Calhoun is a man on a mission. He's flying around the country, warning state lawmakers and prosecutors, sounding the alarm at conferences and with members of Congress.

Mike Calhoun talks about how student loans are forcing younger Americans to delay homeownership at a housing conference in September.
Bridgett Turner / Courtesy of the Center for Responsible Lending

He did the same thing back before the housing market crash, warning then about reckless subprime loans. "We projected over 2 million subprime mortgage foreclosures, and the response was we were ridiculed by the industry," he says.

Of course, Calhoun was right. In fact, the wave of defaults and foreclosures was even worse and drove the economy into the worst recession in generations.

Back then, he was watching the number of risky mortgages grow and grow. Now he's watching student loans, "and there are a lot of similarities," he says. "You've had an absolutely explosive growth in the amount of student debt. In 15 years it's gone from about $300 billion to now $1.6 trillion."

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Calhoun's the president of the nonprofit Center for Responsible Lending. For decades he's been keeping watch to protect people from reckless lending. He says that with student loans, just like with the housing crisis, there's no consideration about whether the person getting the loan will be able to repay it.

"Once again, it's the mismatch between the debt and the borrower's income, their ability to repay," Calhoun says. This time around it's the government making the vast majority of the loans. That's effectively turned the Department of Education into the country's largest consumer lender.

And, Calhoun says, more and more people can't pay. "Already in the student loan world, we are seeing default levels that approach what there was in the subprime mortgage world," he says.

Calhoun pulls up a slide on his computer monitor to show another parallel —minority groups were hit hardest by the subprime mortgage mess.

"And we're seeing it again in student loans. As we sit here and talk today, over a fifth of black college graduates are in default on their student loans." Calhoun cites "the amount of debt they took on and the fact that they typically still earn less in the job market."

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All that may sound bad, but some experts say talk of a student loan crisis is overblown.

Michael McPherson is an economist and former college president who studies higher education financing. "I think of a crisis as being a situation which is getting rapidly worse," he says. That's not what's happening with student loans, McPherson says.

"The amount of borrowing is lower year after year, now for eight years in a row," he says. "That doesn't smell like a crisis."

McPherson says the vast majority of people are clearly better off financially if they have a college-level education or an advanced degree, even if they do have student loans. And he says, "a lot of people borrow a small amount of money, so a third of all the people owe less than $10,000."

McPherson acknowledges that a lot of people who owe relatively small amounts are still running into trouble paying it back. And some never finished college.

This time around, Calhoun says, it's a different kind of lending debacle. It's not going to make the banking system implode. And sure, he says, not everybody with student loans is getting hurt by them. But there are so many people with student loans, and a lot of them are running into serious problems that he says "the student loan crisis will affect tens of millions of families."

Calhoun says people's credit scores are being affected, or they're missing out on homeownership because they can't qualify for a mortgage because of their student loans. And others are ending up tens of thousands of dollars deeper in debt because they're getting bad advice from companies that manage student loans for the government, Calhoun says.

He says that's another parallel with the housing crisis.

Back then, Calhoun says, loan servicing companies failed to connect millions of homeowners with programs that could have helped them avoid foreclosure. Now student loan servicing companies are failing to connect borrowers with loan forgiveness programs and other options that could help them, he says.

The loan servicing companies say they do the best they can to advise borrowers given the complicated array of loans and programs created by the government.

So where does Calhoun think all this is headed? "Hopefully it ends in a couple ways," he says. "For some borrowers, you will need to write down some part of what they owe. They simply don't have the capacity to repay that based upon their earning capacity."

And Calhoun says the government needs to fix the programs that are already in place that could potentially help millions of people. One program in particular could forgive large amounts of debt for public service workers such as police officers and teachers, but Calhoun says it's being badly mismanaged. He also says the government should lower interest rates to ease the burden on people.

Millions of other borrowers, he says, could avoid defaulting on their loans if they were enrolled in existing "income-driven repayment" plans that allow them to make very small payments if that's all they can afford. But many borrowers don't get enrolled in them. Until those problems get fixed, he says, it may not wreck the economy, but it will be a drag on it.

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AUDIE CORNISH, HOST:

Back before the housing market crashed more than a decade ago, a lending watchdog named Mike Calhoun sounded the alarm early on about reckless subprime loans.

MIKE CALHOUN: We projected over 2 million subprime mortgage foreclosures, and the response was we were ridiculed by the industry.

CORNISH: As we know now, Calhoun was right. The wave of foreclosures was even bigger than he predicted, and it drove the economy into the Great Recession. These days, Calhoun is warning about student loans, and he sees a lot of parallels. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: Mike Calhoun is a man on a mission. He's flying around the country, warning state lawmakers and prosecutors, sharing his worries at conferences and with members of Congress. He's saying, just like with the housing crisis, student loans are given out without considering whether the borrower will be able to pay the money back.

CALHOUN: Once again, it's the mismatch between the debt and the borrower's income, their ability to repay.

ARNOLD: Calhoun's the president of the nonprofit Center for Responsible Lending, and he says the amount of money that people owe on student loans is growing very fast.

CALHOUN: Absolutely explosive growth in the amount of student debt. In about a dozen years, it's gone from $300 billion to now $1.6 trillion.

ARNOLD: This time around, it's the government making the vast majority of the loans. That's effectively turned the Education Department into the largest consumer lending bank in the country. And, Calhoun says, more and more people can't pay.

CALHOUN: Already in the student loan world, we are seeing default levels that approach what there was in the subprime mortgage world.

ARNOLD: Wearing a no-nonsense blue blazer with his gray mustache and spectacles, Calhoun could pass for a banker himself. But for decades, he has actually been keeping watch over the banks. In his office in Washington, Calhoun pulls up a slide at his computer monitor and shows me another parallel. In the subprime mortgage mess, minority groups were hit the hardest. And now...

CALHOUN: As we sit here and talk today, over a fifth of black college graduates are in default on their student loans because of the amount of debt they took on and the fact that they typically still earn less in the job market.

ARNOLD: Still, some people say talk of a student loan crisis is overblown. Mike McPherson is an economist and former college president who studies higher ed financing.

MIKE MCPHERSON: I think of a crisis as being a situation which is getting rapidly worse.

ARNOLD: And he says, actually, that's not what's happening with student loans. He says the total amount borrowed in new loans each year has been declining since the peak in 2010. And he says most people with a college or advanced degree, of course, are much better off financially, even if they have student loans. Also...

MCPHERSON: A lot of people borrow a small amount of money, so a third of all the people owe less than $10,000.

ARNOLD: Calhoun acknowledges that this time around, this is a different kind of lending debacle. It's not going to implode the banking system. But he says there are so many people now with student loans, and many owe a lot more money and are running into serious problems.

CALHOUN: The student loan crisis will affect tens of millions of families.

ARNOLD: Calhoun says their credit scores are getting messed up or they're missing out on homeownership because they can't qualify for a mortgage. And this albatross of debt hanging around the necks of so many Americans is now a central issue in the presidential election. So where is all this headed?

CALHOUN: Hopefully, it ends in a couple ways - that for some borrowers, you will need to write down some part of what they owe. They simply don't have the capacity to repay that based upon their earning capacity.

ARNOLD: And Calhoun says the government needs to fix existing programs that could help millions of people. One in particular has promised to forgive large amounts of student loan debt for public service workers, like police and teachers, but it's been badly mismanaged. Also, many people don't get enrolled in repayment plans that could make their loans affordable. Calhoun says until such problems get fixed, it may not wreck the economy, but it will be a drag on it.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.