THESTUDENTLOAN BUBBLEPresented by

GAMBLING WITHAMERICA’S FUTURE...

1

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

T his report was researched and written by SchiffGold’s Precious Metals Specialists; a team of knowledgeable analysts with backgrounds in f inance, economics, and

business. Of seven Specialists who contributed to this report, three have economic degrees, two have master’s degrees, two graduated f rom Ivy League colleges, and three have degrees in business. They share a deep understanding of Austrian Economics, as well as years of industry experience in precious metal markets. This report builds upon Peter Schiff ’s economic analysis of the current global economy to determine the intermediate and long-term effects on gold and silver.

Sincerely,

ChairmanSchiffGold

THANK YOU...

Peter Schiff

2

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

I. INTRODUCTION

After overseeing the inflation and burst of the dot-com

bubble in the 1990s, and the subprime mortgage bubble in the 2000s, the United States federal government is at it again. This time it’s student loans.

As of the end of Q2 2019, more than 44 million borrowers owed $1.61 trillion in student loan debt and that amount continues to climb each quarter. It has grown by leaps and bounds since the financial crisis of 2008, increasing by 125% in the decade between Q2 2009 and Q2 2019.

Meanwhile, student enrollment in colleges and universities actually dropped 7% between 2010 and 2017, according to the National Center for Educational Statistics.

The federal government can’t seem to help itself...

Total Outstanding Student Loan Debt

Deb

t ($

Bill

ion

s)

Year

200

0

400

600

800

1000

1200

1400

1600

1800

20062007

20082009

20102011

20122013

20142015

20162017

20182019

3

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

II. HOW DID WE GET HERE?

Much like the housing bubble that inflated in the years leading up to the 2008 crash, a

combination of easy money central bank policies and government action pumped up the student loan bubble.

In fact, if you look closely, you will find a parallel between the subprime mortgage bubble and the current student loan bubble. Behind them both lurk an unholy alliance between Federal Reserve monetary policy and government intervention.

Much like the housing bubble that inflated in the years leading up to the 2008 crash, a combination of easy money central bank policies and government action pumped up the student loan bubble.In fact, if you look closely, you will find a parallel between the subprime mortgage bubble and the current student loan bubble. Behind them both lurk an unholy alliance between Federal Reserve monetary policy and government intervention.

Artificially low interest rates manufactured by the Fed incentivize borrowing. Government policymaking directs the flow of this borrowed money.

Politicians helped inflate the subprime mortgage bubble through policies designed to guarantee that everybody could attain the American Dream home ownership – regardless of their credit rating. The government incentivized, and in many cases backed, generous home loans to people with little wealth or income and no realistic ability to actually pay them back. As the demand for homes increased, so did their price. That attracted speculative investors who drove home prices up even higher. With artificially depressed interest rates and the assumption that home prices would never cease rising, risky loans didn’t seem like such a bad idea. And with Uncle Sam’s implicit guarantee that he would buy these risky mortgages from banks no matter what, subprime mortgage lending exploded.

Of course, we now know it was foolish to assume home values would go up forever. Eventually, real estate prices became overextended. The bubble popped and home prices began to crash back to earth. The party was over. And Uncle Sam (a.k.a. the American taxpayer) was left footing the bill – to the tune of over $400 billion through the Troubled Asset Relief Program (TARP).

Today we’re witnessing the same plot played out on a different stage. This time, politicians claim that every American has the right to a college education, regardless of their credit rating or their SAT scores. Spurred on by even lower interest rates and the implicit promise that John Q. Taxpayer will once again come to the rescue if anybody happens to default, we now have a growing student loan bubble on our hands.

Ironically, many university officials blame lack of funding for the student loan crisis. A spokesman for a Michigan university

4

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

told a local TV station that the funding cuts have shifted the burden of who pays for college increasingly to students and their families. But this doesn’t explain the spiraling cost of a university education. In fact, the flood of student loan money into universities has actually driven education costs up.

Universities are flush with cash thanks to the infusion of student loan money. With all of those dollars available backed by the good name of Uncle Sam, schools are competing for students and all the college loan dollars that come with them. Schools have to one-up each other with amenities to attract the brightest and best – or whoever can get a loan. As a result, kids today get a much more luxurious university experience than student a few decades ago could have ever imagined. Schools give students free iPads, furnish dorms with Tempurpedic mattresses and granite counter tops, and build multi-million-dollar student centers.

This isn’t mere speculation. A paper published by the National Bureau of Economic Research found that a large percentage of the increase in college tuition can be explained by increases in the amount of available financial aid. In a nutshell, the availability of low interest loans increases the demand for a college education. This creates a “demand shock” that drives tuition sharply upward.

Economists Grey Gordon and Aaron Hedlund wrote their paper for the NBER after creating a sophisticated model of the college market. When they crunched the numbers, they found demand shock accounted for almost all of the tuition increase.

George Mason University economist Alex Tabarrok pointed out that Gordon and Hedlund revealed the inevitable outcome of government financial aid policy in his analysis of their paper for the Foundation for Economic Education.

“Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.”

According to Gordon and Hedlund, the spike in tuition driven by increased financial aid actually crowds out additional enrollment. But students who do enroll end up taking out $6,876 in loans compared to $4,663 absent the increased availability of financial aid. The end-result, a surging loan default rate from 17% to 32%. “Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.” The NBER paper coincided with a study released by the Federal Reserve Bank of New York. Its major conclusion: “We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65%.”

“Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks, net tuition only rises by 16%. These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition.”

II. HOW DID WE GET HERE?

5

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

III. SO WHAT?

At the end of 2008, the default rate on government-backed

student loans stood at 7.9%. It has since increased to around 10%. Even more troubling, according to Department of Education statistics released in late 2018, 43% of those government-backed loans are considered “in distress.”

In November 2018, Education Secretary Betsy DeVos put the level of student debt in perspective. “One-point-five trillion dollars is almost impossible to fathom. So, let me put it this way: $1.5 trillion is more than $10,000 of someone else’s student loan debt for each and every American taxpayer—145 million of them.” Most people saddled with this debt aren’t paying it off. According to DeVos, less than a quarter of student loan borrowers are paying down their principal. Most are simply making interest payment — if they are paying anything at all. Nearly 20% of all loans are delinquent or in default. That’s seven times the rate of delinquency on credit card debt, according to DeVos. DeVos reveals just how significant the level of student debt has become, noting that it comes with “significant risk.

“At 1.5 trillion dollars, FSA’s loan portfolio is now one-third of the Federal government’s balance sheet. Last year, uncollateralized student loans—which are all of them, by the way—accounted for over 30 percent of all federal assets. One-third of the balance sheet. Only through government accounting is this student loan portfolio counted as

anything but an asset embedded with significant risk. In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value. Federal Student Aid has a consumer loan portfolio larger than any private bank. Behemoths like Bank of America or J.P. Morgan pale in comparison. FSA also is the largest direct loan portfolio in the whole Federal government—by far—surpassing all other federal direct loans combined by 1.1 trillion dollars.” DeVos admitted that the spiraling level of student debt has “very real implications for our economy and our future.” “The student loan program is not only burying students in debt, it is also burying taxpayers and it’s stealing from future generations.”

There are growing signs the student loan bubble could soon pop.

7.9%

2008

Student Loan Default Rates

Present

10%

43%In Distress

6

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

III. SO WHAT?

Perhaps the saddest part is that many students receiving these loans aren’t even academically prepared for the rigors of college. As a result, almost half of them won’t graduate and reap any kind of reward from their student-loan-fueled college experience. Instead, they’ll be saddled with debt for years to come, because not even personal bankruptcy can dismiss student loan debt. Even using conservative numbers, along with the current default level and factoring in loans in deference or forbearance, the American taxpayer could be on the hook for over $250 billion in unpaid student loans when the bubble pops. While this figure is smaller than the $400 billion shortfall caused by the subprime mortgage crisis, you have to remember that there is no collateral required for a student loan. Banks can foreclose on and repossess a house when a borrower defaults on their home loan. What can a bank repossess in the case of a student loan? The kid’s diploma? Her knowledge? The bottom line is that each dollar of a defaulted student loan will pack much more of an economic punch. If that seems bleak, just consider the fact that $250 billion is a low-ball figure. Some analysts project that student loan debt could balloon to over $3.3 trillion over the next decade. At the current default rate, that $250 billion would swell to $750 billion.And when the current bubble economy bursts, you can expect the default rate to increase as well.

But wait, there’s more! The 2016 decision to forgive all of the student loans taken out by the students who were deceived by the false promises of privately-run Corinthian Colleges (a total of over $3.5 billion) may have put us on a slippery slope. Many believe the move opened the door for broader debt “forgiveness” for students

attending other private colleges. It may not be long before there is a blanket call for all student loans that are in any sort of trouble to be forgiven. The total numbers here would be absolutely staggering.

And again, it would hang the American taxpayer on the hook.

Some might ask, “What’s the big deal? America is already dealing with massive amounts of debt. Is this really going to make that much of a difference?”

But it is a big deal!

The student loan bubble could add significantly to the nation’s enormous debt burden. More importantly, it is emblematic of an American financial system beholden to a federal government continuing to amass skyrocketing amounts of debt, with neither a demonstrated plan nor any ability to ever pay it off. It’s yet another chunk of debt added on to an ever-increasing pile, now standing at over 106% of GDP according to analysis by Trading Economics. This doesn’t even take into account the federal government’s unfunded liabilities (i.e., all future Medicare and Social Security commitments). According to Boston University economics professor Laurence Kotlikoff, as of early 2019, the US government was facing $200 trillion in unfunded liabilities. When you add that number to the 22 trillion-dollar debt, you get a staggering total of $222 trillion that grows with each passing day.

Laurence Kotlikoff

7

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

III. SO WHAT?

Simply put, the US federal government debt is unsustainable.

But this is how we “roll” in a fiat-currency-based monetary system – especially one that happens to control the world’s reserve currency. The dollar sits in the catbird seat. It is the most owned, most trusted, and most utilized currency in the world. As such, it can burn through enormous political and social capital before there are any serious consequences. But the question is how long can we expect things to just “roll along” smoothly?

The federal government has made way too many promises it simply cannot break without unleashing utter chaos. Can you imagine what will happen if Congress actually takes a stand and says it must tighten its belt and cut spending? Which programs and entitlements will be slashed? The public housing and food stamps millions of poor Americans depend on? Public schools serving millions of families? Medicare and Medicaid? Obamacare? Social security?

To avoid a massive uprising, the political elite will almost certainly just keep borrowing money and printing currency to continue funding these commitments.

The endgame seems to be that the federal government will ultimately have no choice but to monetize its debt. If this is the case, the dollar will lose much of its clout and credibility.

In fact, the Fed already monetized trillions in the wake of the 2008 crash.

In the early days of the Great Recession, then-Federal Reserve Chair Ben Bernanke assured Congress that the Fed was not monetizing debt. He said the difference between debt monetization and the Fed’s policy was that the central bank was not providing a permanent

source of financing. He said the Treasuries would only remain on the Fed’s balance sheet temporarily. He assured Congress that once the crisis was over, the Federal Reserve would sell the bonds it bought during the emergency.

That never happened. After a brief attempt to reduce its balance sheet in 2018, the Fed reversed course and ended quantitative tightening in 2019 after the stock market started showing signs of shakiness.

When the Fed goes back to QE to rescue the economy in the next crash, inflation or even hyperinflation could be the final result.

Ben Bernanke

8

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

III. SO WHAT?

Of course, alternatives to hyperinflation exist. The government could institute one of those notorious “bail-ins,” as Cyprus experienced in 2013. In effect, the government could simply seize the savings accounts of rich and middleclass Americans in order to cover its enormous budgetary shortfall.This seems untenable in today’s political climate, but the people of Cyprus probably never conceived of such a move either. Desperation quickly changes political dynamics.

The fact is that while our financial system seems to be humming along just fine today, a serious reckoning is inevitable. Constantly spending far more than we earn, lending irresponsibly to those who cannot repay, and then just borrowing more

and more in order to cover it all up will, indeed, hit a wall.

History has proven time and again that all fiat currencies eventually implode due to the way central bankers and politicians abuse them. The rapidly expanding student debt bubble is just one.Like all bubbles, the student loan bubble will pop. When it does, it will add to the already massive debt burden. It’s just one more example of abuse that points to the eventual collapse of the US dollar. Lest we forget, the collapse of a major fiat currency would not be just an inconvenience for society, but a crippling blow to Western civilization.

Cyprus Protests - 2013

9

THE STUDENT LOAN BUBBLE

1-888-GOLD-160

IV. WHAT CAN YOU DO?

“Well,” you might say, “This is certainly a very depressing future you’ve painted for us.”

No, it’s not pretty.

But knowing the truth now allows you to prepare for the worst.

There is at least one thing you can do to prepare yourself for the looming financial crisis whether it’s triggered by the student loan bubble popping or some other spark – own physical gold and silver.This will prepare you for the ultimate crisis – a collapse of the US dollar.

The US dollar is a fundamentally broken promise and its trustworthiness will not improve. The dollar’s purchasing power has fallen by over 97% since the Federal Reserve was first established in 1913. Since it is just a piece of paper or a digit on a screen, the dollar holds no true market value, like a commodity. Its monetary value is completely dependent upon the Federal Reserve’s monetary policy. Unfortunately, the Fed is more than willing to abuse its power and print more dollars with the push of a button.

Adding to this inherent risk, if you hold dollars in a US bank, they are vulnerable to seizure should the government execute a bail-in.

However, gold and silver are different.

Over centuries and through trillions of voluntary economic transactions, gold and silver emerged over and over again as the best money. This isn’t just a coincidence. Gold possesses all of the characteristics of money that Aristotle listed 2,000 years ago. The philosopher said sound money must be durable, portable, divisible, and have intrinsic value. You can check off all four of these characteristics for gold. You can also add a fifth characteristic to Aristotle’s list. Sound money cannot be easily manipulated by central bankers – i.e. created out of thin air. That’s why the yellow metal has held its value over time while fiat currencies have fallen in value.

In other words, gold and silver are trustworthy as money. Unlike the dollar, there are no corrupt politicians or arrogant central bankers propping up the precious metals. The dollar is on track to lose its trustworthiness. When it finally does, the world will begin to demand a new, alternative medium of exchange – one that is truly trustworthy. That money will be physical gold and silver.

This report was created for the benefit of the investing public by: SchiffGold LLC1-888-465-3160 | 152 Madison Ave NY, NY 10016 | www.schiffgold.com

To learn more about investing inTo learn more about investing inphysical precious metals,physical precious metals,

call a SchiffGold specialist now atcall a SchiffGold specialist now at

1-888-GOLD-160(1-888-465-3160)

or click one of these optionsREQUEST A CALLBACKLIVE CHAT