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Home Bankers Bankers’ Hours column: Student loan for a mortgage payment

Bankers’ Hours column: Student loan for a mortgage payment

A funny thing happened on the way to writing this piece. A couple of weeks ago, I wrote a column comparing the financial crisis of 2008 and the current COVID-19 crash. As you might imagine, it’s kind of a complex subject. After far too many words, I realized that a comprehensive comparison will be the subject of 1,000-page door-stoppers for the next 50 years or so.

But just to be sure that a gem in the rough wouldn’t end up hidden in the digital depths of my laptop, I submitted the effort to the Bankers’ Hours independent editorial review board (IERB), for an in-depth vetting.

My wife said, “I don’t get it.”

So I took that as a hint to cut the word count, and set out to do a piece on the imminent end to the mortgage forbearance provision of the CARES Act. However, a diversion arose.

A recent Wall Street Journal article on that subject and the possible effects of its end, told of the situation of a married couple, both professionals in the human service field, who won’t be able to resume payments on their mortgage because the wife has been unable to return to work in her field, due to certain circumstance unique to her. Commendably, they want to keep their home and, according to the Journal, they’ve hit upon a creative solution to handle the house payments. She’s a graduate student, so … she plans get student loans to pay the mortgage.

I thought there might be a story there, and there is. The price tag of the projected student loan defaults over the current outstanding life of the debt is $435 billion. In the 2008 meltdown, private lenders were hit with $535 billion in losses on subprime mortgages. Fannie Mae and Freddie Mac were on the hook for a lot more.

Now keep in mind that the ultimate guarantor of the student loan debt is …

Yup, you. The American taxpayer.

It’s a big number by any reckoning. And there’s a significant difference between the subprime mortgage crash and the smoldering crisis in student loans. In 2008, every bad, inflated home loan had collateral securing the debt: a real house, built on real land. When the bubble burst, the mortgages were underwater, but the homes slowly, and then at a substantially accelerated rate, increased in value.

There’s no collateral for a student loan, except the borrower’s future earning potential. Unfortunately, the program is structured so that it effectively stacks the deck against most borrowers; the system’s creators and administrators couldn’t have done a better job of rigging the rules to assure that borrowers would struggle to service the debt.

Here are some stats: On average, 20% of a borrower’s disposable income goes to the education loan. That payment trails only the obligation for shelter, either mortgage payment or rent; the average loan size is $26,495, with a payment of $579 per month.

How did this happen? It’s simple. No esoteric financial algorithms here. These loans are made with virtually no underwriting…

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