Even as evidence mounts that households have undergone significant deleveraging in recent years, student loans continue to expand at strong double-digit rates (student loans are up almost 14% in the past year). As I wrote three years ago, the higher education bubble continues to inflate. Just as the housing crisis was fueled by government demands that banks make it easier for buyers to get a mortgage (e.g., no down payments, floating interest rates, interest-only mortgages, stated income), now we have the emerging student loan/higher education crisis that is being fueled by government demands that students have easier access to credit to finance their education.
In the chart above, we see that student loans started growing explosively in early 2009, after being essentially unchanged for the previous eight years. All of the increase in student loans since the end of 2008, almost $800 billion, was issued by the federal government, which has now essentially co-opted the entire student lending industry. The government has taken over and the mandate is to increase loans no matter what. Consumers in aggregate are deleveraging, but students are leveraging up, and many in a big way. As a percent of consumer credit, student loans are exploding skywards: up from 5.5% at the end of 2008 to almost 27% today.
This will inevitably end in tears for taxpayers, as well as for the students who have taken on onerous levels of debt. Colleges and universities will also suffer, since federal largesse in the form of a flood of new loans has enabled education costs to reach levels that are way out of line with the rest of the economy. Sooner or later, when the student loan plug is finally pulled, colleges and universities will find themselves forced to undergo the same painful restructuring and cost-cutting that devastated the residential construction sector some years ago. Meanwhile graduates are finding themselves burdened by huge levels of debt that many will not be able to service. Politicians are already greasing the wheels of a taxpayer bailout, rest assured. Debt forgiveness will take many guises, but in the end it will just be more "free stuff" that politicians promise in order to buy votes from the ignorant.