Sign of a student loan bubble starting to burst?

by Grace

Student borrowers are facing fewer choices.

The largest bank in the United States will stop making student loans in a few weeks.

JPMorgan Chase has sent a memorandum to colleges notifying them that the bank will stop making new student loans in October,according to Reuters.….

“We just don’t see this as a market that we can significantly grow,” Thasunda Duckett tells Reuters….

Remember the housing bubble that peaked in 2007?

The move is eerily reminiscent of the subprime shutdown that happened in 2007. Each time a bank shuttered its subprime unit, the news was presented in much the same way that JPMorgan is spinning the end of its student lending.

Student loan debt has more than tripled over the last ten years.

There is over $1 trillion in outstanding student loans, making it the second largest source of household debt after mortgages. Just 10 years ago, student loans stood at $240 billion. About $150 billion of the total is comprised of private student loans made by banks and other financial institutions, according to a report issued by the Consumer Finance Protection Bureau last year.

The CFPB reported that around $8 billion of private student loans were in default. That number is likely to go higher if interest rates rise because most private student loans, unlike federal loans, are variable rate loans linked to Libor or the prime rate.

Which institutions are still in the private student loan business?

JPMorgan’s actually the second big private lender to step away from the business. Last year US Bancorp exited the business. That leaves Wells Fargo & Co.,Discover Financial Services Inc., PNC Financial Services GroupSunTrust Banks Inc., and various credit unions as the largest private student lenders. Oh, and of course, Sallie Mae, which was privatized in 2004.

We’ll have to stay tuned to see any more departures, but some data suggest a trend toward a deflating bubble.


Related:  A checklist before you take out a student loan (Cost of College)

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