A quarter of recent college graduates lack jobs
There's been a lot of push back on my claim that JPMorgan Chase's exit from student loans is a classic sign of a credit bubble deflating.
Jordan Weissmann at the Atlantic sums up the case against me nicely:
There are plenty of rational reasons why a Wall Street Behemoth like JPMorgan might have given up on the student loan game, none of which have anything to do with an impending market collapse. To start, the business used to be much more lucrative. Under the old federal lending program, private banks issued loans to college kids, and the debts were guaranteed by Washington. It was all profit, and virtually no risk for investors. But in 2010, Congress and the Obama administration pulled the break on the gravy train and today, all federal loans are made directly to borrowers by the Department of Education. As a result, lenders like Sallie Mae, Wells Fargo, and JPMorgan have been left to scrap with each other over the far tinier market for private student debt. The Consumer Financial Protection Bureau estimates that financial institutions issued less than $6 billion worth of college loans in 2011. The federal government, in contrast, lends more than $100 billion a year to students.
In other words, private student lending has been reduced to a niche. But for JPMorgan, it barely even qualifies as that. There are more than $150 billion worth of outstanding private student loans; according to Reuters, JPMorgan owned just $5 billion of them. The bank has 10 times more auto loans on its books, and 24 times more credit card debt, to say nothing of mortgages. Bruno Iksil, the notorious London Whale, lost more money for JPMorgan on a single ill-fated trade than the bank currently has at stake on its entire private student loan portfolio.
That's all true. Even an epic increase in student loan defaults won't bring JPMorgan to its knees. No one is saying that student loans are going to trigger a 2008-style financial crisis.
But that doesn't mean there isn't a student loan bubble.
At the turn of the century, recent college graduates had an average debt of $15,100. Last year the average debt of graduates was $27,253. This increase in the debt burden has not been matched by economic gains for college graduates. According to the Consumer Finance Protection Bureau, 10 percent of recent graduates of four-year colleges have monthly student loan payments that exceed of 25% of their income. The Bureau of Labor Statistics, which only recently began looking specifically at the employment situation of people in their first few years out of college, says that as of 2011 25.5 percent of recent college graduates were jobless. (Unfortunately, more recent data about recent grads isn't yet available.)
(Read more: The student loan bubble is starting to burst.)
Seven million borrowers are in default on private or federal loans, according to the CFPB. An additional 8.9 million have deferred payments or have their loans in forbearance. These aren't signs of a healthy contingent of borrowers.
—By CNBC's John Carney. Follow me on Twitter @Carney