Bubble, Bubble, Toil and Trouble.

I hope this doesn’t bum you out, but I think it is really important to acknowledge the looming student debt bubble. Think of how cool you will sound at cocktail parties warning everyone that it is coming, and everyone looking at you with blank stares, and then when it does, say along about July of this year, people will think back and say “Hey. Didn’t Jason warn us about this at the Johnson’s back in April?” Or, when it starts to appear as cover stories in Time and The Economist, people will say, “Wow, I got to start listening to that Jason dude. He’s a smart guy.”

So Jason, here’s the deal. 

Let’s start with the total amount of student debt relative to 2000 and 1990:

  And, here’s the chart showing the growth of student loan amounts in absolute dollars over the last decade:

And then, here’s the College Tuition CPI vs. US Home Prices vs. The Overall CPI:

And here is disposable income vs. student loans:

Student loans are set to surpass $1 trillion in total notional for the first time in history on what appears to be relentless demand and interest for this cheap form of educational financing, making this debt burden the single largest form of consumer debt, well bigger than outstanding credit card debt, and smaller only compared to mortgage debt.

One more time: THE SINGLE LARGEST FORM OF CONSUMER DEBT BEHIND HOUSING!!

“The amount of student loans taken out last year crossed the $100 billion mark for the first time ever and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what’s owed on home loans and credit cards.”

How does anyone explain this insatiable demand for this type of debt?

1) It’s cheap.

2) It’s easily accessible (the collateral is education).

3) It’s fungible – a student can take out a loan, yet use part or all of the balance for tangential purchases (that iPhone 4S is looking good). 

But, unlike other consumer loans, these student loans present Taxpayers and other lenders with little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. Most importantly, and totally unlike any other class of loan, the debt can’t be shed in bankruptcy.

“Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children,” says Mark Kantrowitz, publisher of FinAid.org. And, that is horrible for the economy, as well as for the students.

“It’s going to create a generation of wage slavery,” says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.

So … debtors know it’s a bubble, lenders know it’s a bubble, everyone knows it’s a bubble, yet it continues to grow faster now than ever before.

As I have said before, this is a fantastic exercise in observing a slow train wreck and being able to do nothing to stop it. It is without a shadow of a doubt, that not only will the student debt bubble pop, but writedowns on amounts outstanding will be massive, potentially resulting in another hit of 50% to total notionals, or about $500 billion. And since the borrowers will be fully tapped out and won’t be able to pay, and the lenders will plead ignorance, and Congress and the regulators and the administration will be surprised once again, is there any doubt who will be forced to pay for the upcoming bail out?

I don’t think you need a college degree to figure that one out.