The American Dream v The American Economy By: Michael L.

Butler
According to the Financial Crisis Inquiry Commission, reasons for the housing bubble include low interest rates, easy and available credit, scant regulation and toxic loans. Once the price of the underlying asset plummeted, the price of the securities derived from them did as well. Many firms had significant exposure to those subprime mortgage derived toxic assets and lost billions. Overall, there were trillions of dollars in losses.1 There are certainly similarities between subprime mortgages and student loans. Both are usually large in value, relate to the concept of the American Dream and are available to borrowers with poor credit quality. Most Americans require large loans to purchase homes and to fund postsecondary education. From 1987 to 2010, the price of a home grew 108.38%.2 The price of a bachelors degree grew 84.55% in that time.3 Median household income however grew a mere 2.98% from 1987 to 2010.2 Upward mobility is a core principle of the American Dream. For many, this requires the purchase of a new home and a postsecondary education. More than two thirds of all postsecondary education students receive aid from the federal government. Moreover, nearly all postsecondary education students in the U.S. are eligible for some form of federal student loan, regardless of their credit worthiness.4 From 2005 to 2007, private lenders relaxed their underwriting standards and were far more likely to lend to subprime borrowers. See Id. According to the Director of The Consumer Protection Bureau, Richard Conrad, much like the victims of pre-financial crisis predatory lending practices, Too many student loan borrowers are

struggling to pay off the private student loans that they did not understand and cannot afford.5 Lenders of student loans are unable to foreclose on the asset purchased with the loan. Not only does this mean that default risk is inherently higher, it also eliminates the lenders ability to recover cost when the borrower is actually unable to pay. Additionally, borrowers are unable to discharge student loan debt through bankruptcy.6 Thus, lenders will continually pursue repayment and borrowers will ultimately repay. Rather than defaults translating into losses on the balance sheets of financial institutions, systematic risk may come from the inability or delay of a large segment population (recent college graduates) to support consumer spending. Young adults are graduating college at all time highs according to a recent Pew Research Center analysis. According to the report, a sharply diminished labor market and changing public attitudes may have emphasized the need for education following the financial crisis. Around 32% of the population, ages 25 and older, had received a college diploma in 2011 as opposed to approximately 19.5% in 1987.7 Relatedly, student loan debt is also at an all time high. In fact, student loan debt is only second to mortgages as a household debt sources and has topped $1trillion nationally.8 Ceteris paribus, an increase in the supply of college graduates will inversely affect their equilibrium wage. If we factor in a poor job market, stagnant wages, increasing expenses and the inability for borrowers to escape student loan debt, the forecast looks bleak for many college graduates. It may be beneficial for the economy if employers began to hire recent college graduates at a median wage. This would allow recent graduates to both meet their student loan requirements as well as contribute to consumer spending.
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The Financial Crisis Inquiry Commission, 2011. The Financial Crisis Inquiry Report : Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, Washington DC: U.S. Government Printing Office. 2 Federal Reserve Bank of St. Louis : Economic Research Division, 2013. National Composite Home Price Index for the United States. St. Louis: s.n. 3 U.S. Department of Commerce; U.S. Census Bureau, 2011. Current Population Survey; Annual Social and Economic Supplements. Washington D.C.: Census.gov. 4 The Consumer Financial Protection Bureau and The U.S. Department of Education, 2012. Private Student Loans, Washington D.C.: The Consumer Financial Protection Bureau.

Consumer Financial Protection Bureau, 2012. PRESS RELEASES: Consumer Financial Protection Bureau and U.S. Department of Education Joint Report Finds a Cylce of Boom and Bust in Private Student Loan Market. [Online] [Accessed 19 July 2013]. 6 11 U.S.C. 101 (1978); Pub. L. No. 98-353, 98 Stat. 333 (1984); Pub. L. No. 109-8, 119 Stat. 23 ( 2005) 7 Fry, R. & Parker, K., 2012. Record Shares of Young Adults Have Finished Both High School and College, Washington D.C.: Pew Social & Demographic Trends. 8 The Federal Reserve Bank of New York, 2013. Quaterly Report on Household Debt and Credit, New York: The Federal Reserve Bank of New York.