Totaling $1.3 trillion, Student Loans are America’s second largest source of debt. With 7.6 million (18 percent of accounts) already in default and 10.8 million more (25 percent of accounts) behind on their payments, it is also one of the most unstable sources of debt. With 40 million accounts (93 percent of accounts) held by the U.S. Department of Education and 100 percent of accounts backed by the “Full Faith and Credit of the United States” rather than collateral, it is also likely going to get incredibly expensive to the American taxpayer.

To understand what got us here, we have to go back to 1965.

Before 1965, student loans were issued directly by the federal government. In order to make loans cheaper and more available to the public, The Higher Education Act of 1965 allowed private banks and special entities to originate student loans which were guaranteed, backed and subsidized by the federal government. The banks would then bundle these very safe streams of debt and sell bonds directly to local governments, non-profits and other entities qualified to buy tax-exempt bonds. In addition, these banks earned billions more selling these bonds on the New York Stock Exchange and NASDAQ bond markets.

It was not until 1994 that the government began originating these loans again. By 2009, the USDOE originated one-third of the student loans and in 2010, they originated all of them, eliminating private industry almost completely from student loans. How? The Healthcare and Education Reform Bill.

Within the Healthcare and Education Reconciliation Act of 2010, the federal government declared that it would not subsidize student loans anymore. Overnight, the Department of Education became one of the country’s largest and most profitable banks to have almost zero interaction with its clients. As such, the USDOE still hires private debt collection firms owned by JPMorgan, Chase, Citigroup and the like to collect payments. To reach their large quotas, which are expected to make an estimated $2 billion in commissions alone according to National Consumer Law Center, they will use the most aggressive collection tactics available.

Why did the government take over the market?

The turning point begins in 2008. The American housing bubble burst and global recession ensued. Prior to this, the government had been cutting back on loan subsidies (60 percent in cutback in 2007 alone) to make room for their expansions of Pell Grants to minorities and lower income students. As a result, the loans were less profitable and banks became less interested in making them. As banks backed away, the government was more than happy to take over because they believed it would save them billions in subsidies paid to banks and that they would make a $40 billion profit in interest over the next 10 years. These assumptions have not panned out for one very obvious and foreseeable reason: the job market is getting worse, not better.

The number of people with student loans is growing and the number of people with the ability to pay them is shrinking. As such, default rates will continue to climb – and the government knows this.

To slow the inevitable government bailout of the market, the Obama administration has approved several different loan forgiveness programs which allow people to take on lighter monthly payments if particular qualifications are met. The most notable of these being “Pay As You Earn” and “Income-Based Repayment.”

Now that we have an idea of just how volatile the student loan market is, the next rational question to address is, “What happens if the Student Loan market actually collapses?” The best case scenario is a painful market correction, or a return to the actual equilibrium of Supply and Demand in the Education market.

Next week, I will explain what that looks like.