Turns out, I'm subprime, not sublime - and other sentiments from degree holders.

The student loan bubble, subprime degrees, and spooky pre-covid economic predictions coming true.

I want to build off the conversation that we began last time regarding the degree-saturated workforce and student loans.

Ironically, since I published the last piece, it seems a lot of news has been coming out regarding student loans and the restructuring of them by the Trump Administration. They had closed online applications for income-driven repayment plans but have since reopened them, or something like that. New headlines come out every day and the situation keeps changing.

This touches on what I wanted to discuss anyway, which is the student loan bubble, but first we have to set the scene.

Housing Bubble Crisis of 2007

To put it simply, federal student loans are not fixed rate. The Federal Reserve, which is the central bank of the US, sets a minimum interest rate for which banks can lend money at in order to keep the economy balanced. As of April 2025, the rate is set at 4.25-4.5%.

Okay, so what does that mean?

The prime example for this is if you were to buy a house right now, the loan you take out to buy the house will accrue interest probably around 4.25-5%, depending on your bank, for the entirety of the loan, typically 30 years. The rate is fixed when you buy the house, and it has a significant effect on what your monthly payments will look like.

Example: If you we’re to buy a house for $300k with $60k (20%) down at a 4% interest rate for 30 years, you’d pay a total of $172,486 in interest. If that rate was instead 5%, you’d pay a total of $223,813 in interest. It adds up. But at least you know what you signed up for, right?

Well, leading up to the housing-bubble financial collapse of 2007-2009, people were given loans to buy homes, but they weren’t fixed rate, they were subprime adjustable-rate mortgages (ARM). Anyone could qualify for these loans, even if they didn’t seem like solid borrowers.

Everyone could buy a house and house prices started to go up. They kept going up, with more people taking out loans or refinancing to buy houses, even if they had no income, and then when the adjustable rate got adjusted and went up, people stopped being able to make their monthly payments and everything fell apart. Leading to the economic crash we all remember so fondly.

This is a brief summary I’m offering to set up my point, but I’m sure my economist friends will knick pick at it. It’s fine. I would recommend watching “The Big Short” if you really want to get in the weeds.

One other point is that the mortgage loans given out by banks were then packaged and sold by the banks as “investment opportunities.”

The reason why your 401k was going up was because your “investment” was the money used to fuel the subprime loans, and your investment would grow as people made payments toward their loans. There’s all sorts of ways these investment opportunities are packaged and made to look good even when they’re bad, but usually they look good because someone made the executive decision to tell everyone they were good, even though they weren’t.

Once people started defaulting (not making payments) on their mortgage loans, the 401ks stopped growing, and people began asking what they were invested in anyway.

My investment was dependent on people with zero income paying back a loan with an interest rate that has mood swings?

Essentially.

Homeowners were set up for failure from the start, and then the whole economic system collapsed and the home owners were blamed.

I bring up the 2007 housing bubble not because I think everyone wants to relive it but because, at least to me and some voices I’ve found, we seem to be repeating this pattern now. With student loans.

Student Loans and Delinquency Rates

This time, instead of passing out subprime mortgage loans to everyone, we’re passing out student loans to anyone who wants to get a higher education, whether that specific education path is a good investment or not. And just like the mortgage loans, this debt is being packaged with a little bow and sold to investors.

Federal student loans have been handed out with this “we’ll cross that bridge when we get there” type of attitude for how government plans on getting the money back. Payment plans have been somewhat contingent on success after college (income-driven) and somewhat not (pausing of income-driven, promises of loan forgiveness, etc.).

It’s never been super clear, at least not to me. Throw COVID-19 in there and the stress that caused students, young college grads, and the overall economy and we’ve reached a messy situation.

People who were given loans to go to school are finding it more difficult to pay these back. Maybe they were able to make payments when it was income-driven or pre-pandemic, but if things get restructured or payments and total debt begin to outweigh their means for living then they’re not going to prioritize the student loans over other expenses. Then their credit score will get damaged. Things will get tough.

This isn’t only the case for people having difficulty finding jobs, this is the reality for many secure careers with high amounts of student loans like lawyers, doctors, dentists, etc.

Ultimately, Basic Needs > Credit Score… if it were that simple and if these things weren’t intrinsically dependent on each other.

Show Me the Money

Here’s some numbers for you, but feel free to skip if that’s not your thing…

In this article from CNN posted on March 26th, they state that student loan delinquencies (at least 9 months of no payments) are poised to hit record highs this year based on Federal Student Aid data. Estimates show that 15.6% of federal loans were likely past due at the end of 2024, with more than $250 billion in delinquent debt held by 9.7 million borrowers.

For perspective, in October 2007 the delinquency rate for subprime ARM loans had reached 16% as everything started to slip.

I’ll let that sink in.

It is important to include here that the total amount of mortgage loans in 2008 reached $10.5 trillion, with subprime loans making up about $1.3 trillion (~$1.8 in modern value).

As of 2024, the total amount of student loan debt (federal and private, but private makes up a very small %) reached around $1.77 trillion.

The total amount of mortgage loans in 2008 obviously outweighs the current amount of student loans we’re seeing now, but the subprime loans, the risky ones, about equalled what were seeing now in student loans.

That was a lot of math…

You’re right, sorry about that. Got a little carried away. But, essentially, the situation we (the American people) are in with student loans looks very similar to what things looked like in the housing market in 2007, and I’m sure investors are beginning to sweat.

Houses at least retain some value, even if the market crashes. No one will ever be able to get a house for $0 because there will always be someone willing to pay more than $0. It’s still an asset, and a roof.

But Jimmy with his degree in communications? The value (of the degree) could be $0 if no one is willing to pay him for those skills. The value of the degree (the asset) is completely subjective to the environment that Jimmy finds himself in.

Similar to housing though, Jimmy’s value (his labor as the asset rather than his degree) will never be $0, because he could choose to accept a low paying job that doesn’t require a degree (or does). But will $15/hr pay back his $50k in student loans?

In this economy?

Probably not, and neither will $20/hr, $25/hr, or $30/hr.

And is Jimmy willing to swallow his pride and take a lower-paying (but available) job rather than hold out for something else that might never come?

The investors and their clients’ 401k’s are waiting Jimmy, tick tock.

Let me get this straight…

It is a bit scary when we reconsider the shortage of available jobs seeking people with degrees. And the amount of jobs going unfilled that don’t require a degree. And there’s all these people with student loans and high hopes looking to contribute to society in the ways they want to contribute, but their contributions aren’t needed. And while we’re at it, give them their money back, Jimmy, you’re a bad investment. Pull the bootstraps of your fresh leather loafers you bought for your internship harder and get to work.

It feels like getting kicked while we’re down and trying to adjust as best we can. Hang on though, my pre-frontal cortex just finished developing like two years ago, can’t we just restructure those decisions I made when I was 18??

Lets keep it straight, Jimmy - am I saying that the government gladly gave you money to go to college and get a degree, and they sold your debt as an investment for others, but now there are no jobs requiring your degree that you took out loans for, so now you’re being blamed? Yes, sorry to break it to you. We’ll talk about strategies to address this problem another time, but there are a few more points I need to make first.

George has something to say.

A book I read a few years ago (published in Feb 2020), The Storm Before the Calm by George Friedman, dissected all of this. The book discusses the political and economic cycles of the US since its founding and seeks to explain the coming crisis of the 2030s. It’s a fascinating read with many predictions that I have seen come to fruition, and I’m starting to think George is a psychic. I wanted to highlight some points from his book.

Regarding the bundling of student loans:

Just as mortgage derivatives were bundled and sold, that is happening now with student loans. Where mortgages were bought by Fannie Mae and Freddie Mac, both federal entities designed to provide liquidity in the mortgage market, so Sallie Mae, the federal equivalent for student loans, is buying, bundling, and reselling student loans.

“No no, Jimmy’s degree in communications is a really good investment, trust me” - Sallie Mae to investors probably.

Another quote:

The universities, the center of gravity of the technocracy, will become the battleground of this crisis whose fate will ultimately be determined by the federal government. This will be doubly the case when the $1.3 trillion student debt problem begins driving the financial markets.

Student debt problems driving the financial markets is a bold claim, but I’m listening.

Last quote:

The federal government will find it increasingly hard to function, and the norm is to blame the federal employee for a systemic problem. *cough cough!* The universities will be under attack for their class biases, inefficiencies, and the attempt to cope with the de-leveraging of the student loan bubble. Those in the high-tech sector will find themselves far less glamorous or easily employed than before. The financial sector, the most agile of the group, will be restructuring to profit from the new reality.

Blame the federal employees? We would neverrrrr, come on now.

My friend just told me her little brother who graduated last year with a degree in computer science has been working at Home Depot because he can’t find a tech job. I wouldn’t say Home Depot is far less glamorous… but maybe George would?

I wanted to include these book quotes last because they’re kind of chilling to read five years after publication.

Should we be scared?

I didn’t want to bring up this topic to scare anyone into thinking there will be a financial crisis because of student loans, because who knows. Not trying to fear-monger, and I think it would take more than just instability with student loans to cause serious damage. It’s important to be aware of the bigger picture though.

We all know someone in the muck of this issue, whether its you, me, my husband, your husband, your child, friend, family member, neighbor... For me, it’s me. And my husband. And a majority of our friends. I’m happy to say my neighbors are doing well though!

At 18, we didn’t know our decision to take out loans and go to college was secretly an investment plan sold to investors based on the promise of jobs we’d hypothetically obtain afterward. That’s on you for betting on me and Jimmy in our subprime, or whoever it was who’s betting on student loans. Who’s idea was all of this anyway?

We can’t go back and change our decisions retrospectively to avoid this situation, but we can pivot, and thats what I’m excited to continue diving into. Stay tuned.