THE
STUDENT
LOAN BUBBLE
Presented by
GAMBLING WITH
AMERICA’S FUTURE...
THANK YOU...
THE STUDENT
LOAN BUBBLE
T
his report was researched and written by SchiffGold’s Precious Metals Specialists;
a team of knowledgeable analysts with backgrounds in f inance, economics, and
business. Of seven Specialists who contributed to this report, three have economic
degrees, two have master’s degrees, two graduated f rom Ivy League colleges,
and three have degrees in business. They share a deep understanding of Austrian
Economics, as well as years of industry experience in precious metal markets. This
report builds upon Peter Schiff ’s economic analysis of the current global economy to
determine the intermediate and long-term effects on gold and silver.
Sincerely,
Peter Schiff
Chairman
SchiffGold
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1
I. INTRODUCTION
THE STUDENT
LOAN BUBBLE
The federal government can’t seem to help itself...
A
fter overseeing the inflation
and burst of the dot-com
bubble in the 1990s, and the
subprime mortgage bubble in the
2000s, the United States federal
government is at it again. This time
it’s student loans.
As of the end of Q2 2019, more than
44 million borrowers owed $1.61
trillion in student loan debt and
that amount continues to climb
each quarter. It has grown by leaps
and bounds since the financial
crisis of 2008, increasing by 125% in
the decade between Q2 2009 and
Q2 2019.
Meanwhile, student enrollment in colleges and universities actually dropped 7% between 2010 and 2017,
according to the National Center for Educational Statistics.
Total Outstanding Student Loan Debt
1800
1400
1200
1000
800
600
400
200
6
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
0
20
0
Debt ($ Billions)
1600
Year
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II. HOW DID WE GET HERE?
M
uch like the housing bubble that inflated
in the years leading up to the 2008 crash, a
combination of easy money central bank policies
and government action pumped up the student
loan bubble.
In fact, if you look closely, you will find a parallel
between the subprime mortgage bubble and the
current student loan bubble. Behind them both
lurk an unholy alliance between Federal Reserve
monetary policy and government intervention.
Artificially low interest rates manufactured by
the Fed incentivize borrowing. Government
policymaking directs the flow of this borrowed
money.
Politicians helped inflate the subprime mortgage
bubble through policies designed to guarantee
that everybody could attain the American Dream
home ownership – regardless of their credit rating.
The government incentivized, and in many cases
backed, generous home loans to people with little
wealth or income and no realistic ability to actually
pay them back. As the demand for homes increased,
so did their price. That attracted speculative
THE STUDENT
LOAN BUBBLE
investors who drove home prices up even higher.
With artificially depressed interest rates and the
assumption that home prices would never cease
rising, risky loans didn’t seem like such a bad idea.
And with Uncle Sam’s implicit guarantee that
he would buy these risky mortgages from banks
no matter what, subprime mortgage lending
exploded.
Of course, we now know it was foolish to assume
home values would go up forever. Eventually, real
estate prices became overextended. The bubble
popped and home prices began to crash back to
earth. The party was over. And Uncle Sam (a.k.a.
the American taxpayer) was left footing the bill – to
the tune of over $400 billion through the Troubled
Asset Relief Program (TARP).
Today we’re witnessing the same plot played out
on a different stage. This time, politicians claim
that every American has the right to a college
education, regardless of their credit rating or their
SAT scores. Spurred on by even lower interest rates
and the implicit promise that John Q. Taxpayer will
once again come to the rescue if anybody happens
to default, we now have a growing student loan
bubble on our hands.
Ironically, many university officials blame
lack of funding for the student loan crisis.
A spokesman for a Michigan university
told a local TV station that the funding
cuts have shifted the burden of who pays
for college increasingly to students and
their families. But this doesn’t explain the
spiraling cost of a university education. In
fact, the flood of student loan money into
universities has actually driven education
costs up.
Universities are flush with cash thanks to
the infusion of student loan money. With
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II. HOW DID WE GET HERE?
all of those dollars available backed by the good
name of Uncle Sam, schools are competing for
students and all the college loan dollars that come
with them. Schools have to one-up each other
with amenities to attract the brightest and best –
or whoever can get a loan. As a result, kids today
get a much more luxurious university experience
than student a few decades ago could have ever
imagined. Schools give students free iPads, furnish
dorms with Tempurpedic mattresses and granite
counter tops, and build multi-million-dollar student
centers.
This isn’t mere speculation. A paper published by
the National Bureau of Economic Research found
that a large percentage of the increase in college
tuition can be explained by increases in the amount
of available financial aid. In a nutshell, the availability
of low interest loans increases the demand for a
college education. This creates a “demand shock”
that drives tuition sharply upward.
Economists Grey Gordon and Aaron Hedlund
wrote their paper for the NBER after creating a
sophisticated model of the college market. When
they crunched the numbers, they found demand
shock accounted for almost all of the tuition
increase.
George Mason University economist Alex Tabarrok
pointed out that Gordon and Hedlund revealed
the inevitable outcome of government financial
aid policy in his analysis of their paper for the
Foundation for Economic Education.
“Remarkably, so much of the subsidy is translated
into higher tuition that enrollment doesn’t increase!
What does happen is that students take on more
debt, which many of them can’t pay.”
THE STUDENT
LOAN BUBBLE
“Specifically, with demand shocks alone, equilibrium
tuition rises by 102%, almost fully matching the 106% from
the benchmark. By contrast, with all factors present except
the demand shocks, net tuition only rises by 16%. These
results accord strongly with the Bennett hypothesis, which
asserts that colleges respond to expansions of financial aid
by increasing tuition.”
compared to $4,663 absent the increased availability
of financial aid. The end-result, a surging loan
default rate from 17% to 32%. “Essentially, demand
shocks lead to higher college costs and more debt,
and in the absence of higher labor market returns,
more loan default inevitably occurs.”
The NBER paper coincided with a study released
by the Federal Reserve Bank of New York. Its
major conclusion: “We find that institutions more
exposed to changes in the subsidized federal loan
program increased their tuition disproportionately
around these policy changes, with a sizable passthrough effect on tuition of about 65%.”
According to Gordon and Hedlund, the spike in
tuition driven by increased financial aid actually
crowds out additional enrollment. But students
who do enroll end up taking out $6,876 in loans
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III. SO WHAT?
THE STUDENT
LOAN BUBBLE
There are growing signs the student loan bubble could soon pop.
A
t the end of 2008, the default
rate on government-backed
student loans stood at 7.9%. It has
since increased to around 10%.
Even more troubling, according to
Department of Education statistics
released in late 2018, 43% of those
government-backed
loans
are
considered “in distress.”
Student Loan Default Rates
10%
7.9%
43%
In Distress
In November 2018, Education
Secretary Betsy DeVos put the level
of student debt in perspective.
“One-point-five trillion dollars is
almost impossible to fathom. So,
Present
2008
let me put it this way: $1.5 trillion
is more than $10,000 of someone
else’s student loan debt for each
anything but an asset embedded with significant
and every American taxpayer—145 million of risk. In the commercial world, no bank regulator
them.”
would allow this portfolio to be valued at full,
face value. Federal Student Aid has a consumer
Most people saddled with this debt aren’t paying loan portfolio larger than any private bank.
it off. According to DeVos, less than a quarter of Behemoths like Bank of America or J.P. Morgan
student loan borrowers are paying down their pale in comparison. FSA also is the largest direct
principal. Most are simply making interest payment loan portfolio in the whole Federal government—
— if they are paying anything at all. Nearly 20% of by far—surpassing all other federal direct loans
all loans are delinquent or in default. That’s seven combined by 1.1 trillion dollars.”
times the rate of delinquency on credit card debt,
according to DeVos.
DeVos admitted that the spiraling level of student
debt has “very real
DeVos reveals just how significant the level of implications for our
student debt has become, noting that it comes economy
and
our
with “significant risk.
future.”
“At 1.5 trillion dollars, FSA’s loan portfolio is now
one-third of the Federal government’s balance
sheet. Last year, uncollateralized student loans—
which are all of them, by the way—accounted for
over 30 percent of all federal assets. One-third
of the balance sheet. Only through government
accounting is this student loan portfolio counted as
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“The student loan
program is not only
burying students in
debt, it is also burying
taxpayers and it’s
stealing from future
generations.”
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III. SO WHAT?
Perhaps the saddest part is that many students
receiving these loans aren’t even academically
prepared for the rigors of college. As a result,
almost half of them won’t graduate and reap any
kind of reward from their student-loan-fueled
college experience. Instead, they’ll be saddled with
debt for years to come, because not even personal
bankruptcy can dismiss student loan debt.
Even using conservative numbers, along with
the current default level and factoring in loans in
deference or forbearance, the American taxpayer
could be on the hook for over $250 billion in unpaid
student loans when the bubble pops. While this
figure is smaller than the $400 billion shortfall
caused by the subprime mortgage crisis, you have
to remember that there is no collateral required for a
student loan. Banks can foreclose on and repossess
a house when a borrower defaults on their home
loan. What can a bank repossess in the case of a
student loan? The kid’s diploma? Her knowledge?
The bottom line is that each dollar of a defaulted
student loan will pack much more of an economic
punch.
If that seems bleak, just consider the fact that $250
billion is a low-ball figure. Some analysts project
that student loan debt could balloon to over $3.3
trillion over the next decade. At the current default
rate, that $250 billion would swell to $750 billion.
And when the current bubble economy bursts, you
can expect the default rate to increase as well.
But wait, there’s more!
The 2016 decision to forgive all of the student loans
taken out by the students who were deceived
by the false promises of privately-run Corinthian
Colleges (a total of over $3.5 billion) may have put us
on a slippery slope. Many believe the move opened
the door for broader debt “forgiveness” for students
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THE STUDENT
LOAN BUBBLE
attending other private colleges. It may not be long
before there is a blanket call for all student loans
that are in any sort of trouble to be forgiven. The
total numbers here would be absolutely staggering.
And again, it would hang the American taxpayer on
the hook.
Some might ask, “What’s the big deal? America
is already dealing with massive amounts of
debt. Is this really going to make that much of a
difference?”
But it is a big deal!
The student loan bubble
could add significantly
to
the
nation’s
enormous debt burden.
More importantly, it
is emblematic of an
American
financial
system beholden to a
federal
government
continuing to amass
skyrocketing amounts
Laurence Kotlikoff
of debt, with neither
a demonstrated plan nor any ability to ever pay it
off. It’s yet another chunk of debt added on to an
ever-increasing pile, now standing at over 106% of
GDP according to analysis by Trading Economics.
This doesn’t even take into account the federal
government’s unfunded liabilities (i.e., all future
Medicare and Social Security commitments).
According to Boston University economics
professor Laurence Kotlikoff, as of early 2019, the US
government was facing $200 trillion in unfunded
liabilities. When you add that number to the 22
trillion-dollar debt, you get a staggering total of
$222 trillion that grows with each passing day.
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III. SO WHAT?
Simply put, the US federal government debt is
unsustainable.
But this is how we “roll” in a fiat-currency-based
monetary system – especially one that happens
to control the world’s reserve currency. The dollar
sits in the catbird seat. It is the most owned, most
trusted, and most utilized currency in the world.
As such, it can burn through enormous political
and social capital before there are any serious
consequences.
But the question is how long can we expect
things to just “roll along” smoothly?
The federal government has made way too
many promises it simply cannot break without
unleashing utter chaos. Can you imagine what will
happen if Congress actually takes a stand and says
it must tighten its belt and cut spending? Which
programs and entitlements will be slashed? The
public housing and food stamps millions of poor
Americans depend on? Public schools serving
millions of families? Medicare and Medicaid?
Obamacare? Social security?
THE STUDENT
LOAN BUBBLE
To avoid a massive uprising, the political elite
will almost certainly just keep borrowing money
and printing currency to continue funding these
commitments.
The endgame seems to be that the federal
government will ultimately have no choice but to
monetize its debt. If this is the case, the dollar will
lose much of its clout and credibility.
In
fact,
the
Fed
already
monetized
trillions in the wake
of the 2008 crash.
In the early days of the
Great Recession, thenFederal Reserve Chair
Ben Bernanke assured
Congress that the Fed
was not monetizing
debt. He said the Ben Bernanke
difference
between
debt monetization and the Fed’s policy was that
the central bank was not providing a permanent
source of financing. He said the Treasuries
would only remain on the Fed’s balance
sheet temporarily. He assured Congress
that once the crisis was over, the Federal
Reserve would sell the bonds it bought
during the emergency.
That never happened. After a brief attempt
to reduce its balance sheet in 2018, the Fed
reversed course and ended quantitative
tightening in 2019 after the stock market
started showing signs of shakiness.
When the Fed goes back to QE to rescue
the economy in the next crash, inflation
or even hyperinflation could be the final
result.
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III. SO WHAT?
Of course, alternatives to hyperinflation exist. The
government could institute one of those notorious
“bail-ins,” as Cyprus experienced in 2013. In effect,
the government could simply seize the savings
accounts of rich and middleclass Americans in
order to cover its enormous budgetary shortfall.
This seems untenable in today’s political climate,
but the people of Cyprus probably never conceived
of such a move either. Desperation quickly changes
political dynamics.
The fact is that while our financial system seems
to be humming along just fine today, a serious
reckoning is inevitable. Constantly spending far
more than we earn, lending irresponsibly to those
who cannot repay, and then just borrowing more
THE STUDENT
LOAN BUBBLE
and more in order to cover it all up will, indeed, hit
a wall.
History has proven time and again that all fiat
currencies eventually implode due to the way
central bankers and politicians abuse them. The
rapidly expanding student debt bubble is just one.
Like all bubbles, the student loan bubble will pop.
When it does, it will add to the already massive
debt burden. It’s just one more example of abuse
that points to the eventual collapse of the US dollar.
Lest we forget, the collapse of a major fiat currency
would not be just an inconvenience for society, but
a crippling blow to Western civilization.
Cyprus Protests - 2013
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IV. WHAT CAN YOU DO?
“Well,” you might say, “This is certainly a very
depressing future you’ve painted for us.”
THE STUDENT
LOAN BUBBLE
Adding to this inherent risk, if you hold dollars in a
US bank, they are vulnerable to seizure should the
government execute a bail-in.
No, it’s not pretty.
However, gold and silver are different.
But knowing the truth now allows you to prepare
for the worst.
There is at least one thing you can do to prepare
yourself for the looming financial crisis whether it’s
triggered by the student loan bubble popping or
some other spark – own physical gold and silver.
This will prepare you for the ultimate crisis – a
collapse of the US dollar.
Over centuries and through trillions of voluntary
economic transactions, gold and silver emerged
over and over again as the best money. This isn’t just a
coincidence. Gold possesses all of the characteristics
of money that Aristotle listed 2,000 years ago. The
philosopher said sound money must be durable,
portable, divisible, and have intrinsic value. You can
check off all four of these characteristics for gold.
You can also add a fifth characteristic to Aristotle’s
list. Sound money cannot be easily manipulated by
central bankers – i.e. created out of thin air. That’s
why the yellow metal has held its value over time
while fiat currencies have fallen in value.
In other words, gold and silver are trustworthy
as money. Unlike the dollar, there are no corrupt
politicians or arrogant central bankers propping up
the precious metals. The dollar is on track to lose
its trustworthiness. When it finally does, the world
will begin to demand a new, alternative medium
of exchange – one that is truly trustworthy. That
money will be physical gold and silver.
The US dollar is a fundamentally broken promise
and its trustworthiness will not improve. The
dollar’s purchasing power has fallen by over 97%
since the Federal Reserve was first established in
1913. Since it is just a piece of paper or a digit on a
screen, the dollar holds no true market value, like
a commodity. Its monetary value is completely
dependent upon the Federal Reserve’s monetary
policy. Unfortunately, the Fed is more than willing
to abuse its power and print more dollars with the
push of a button.
To learn more about investing in
physical precious metals,
call a SchiffGold specialist now at
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