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Watchdog Who Warned Of Subprime Mortgage Crisis Is Now Sounding Alarms On Student Debt

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Watchdog Who Warned Of Subprime Mortgage Crisis Is Now Sounding Alarms On Student Debt

Mike Calhoun was dismissed as a doomsdayer when he sounded the alarm on subprime mortgages ahead of the 2008 housing market crash.

"We projected over 2 million subprime mortgage foreclosures, and the response was we were ridiculed by the industry," Calhoun, the president of the Center for Responsible Lending, told NPR.

Unfortunately, history has proven Calhoun prophetic in these matters, which is why his latest message is distressing.

Somewhere in the last decade, Calhoun turned his eye from mortgage trends to student loan trends — and found that his charts hardly changed.

“There are a lot of similarities," he said. "You've had an absolutely explosive growth in the amount of student debt. In 15 years it's gone from about $300 billion to now $1.6 trillion."

The calculus behind the loans isn’t much different, either.

"Once again, it's the mismatch between the debt and the borrower's income, their ability to repay," Calhoun said.

"This time around it's the government making the vast majority of the loans. That's effectively turned the Department of Education into the country's largest consumer lender."

The loans continue to be issued in burdensome sums, even as an increasing number of borrowers demonstrate an inability to pay. "Already in the student loan world, we are seeing default levels that approach what there was in the subprime mortgage world,” Calhoun said.

Of course, the loan crisis isn’t expected to affect all former students or even all borrowers. Many have used their expensive degrees to negotiate salaries supporting a sustainable pay schedule.

But Calhoun suspects tens of millions of families could suffer. And as their credit scores fall and they fail to qualify for mortgages to purchase homes, their financial limitations will affect the economy.

As was the case with subprime mortgages, the warning of student loan defaults is meeting industry pushback.

"The amount of borrowing is lower year after year, now for eight years in a row," economist Michael McPherson said. "That doesn't smell like a crisis."

But Calhoun is one-for-one on his unlikely predictions. Time may again prove his foresight to be correct. 

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