Tuesday, January 28, 2014

The Student Debt Crisis: Meet The Monster

Seth Mason Charleston SC blog 9
Washington has shown little concern about the destructive potential of its next economic monster, America's ballooning student debt burden. Although the Financial Crisis should have taught the feds a thing or two about the perils of indiscriminate lending, Uncle Sam continues to invigorate his latest Frankenstein by lending to nearly any aspiring student for nearly any degree program (continuing to drive-up the cost of tuition in the process). And he has a perverse incentive to continue his reckless lending policies: he's pocketing tens of billions of dollars annually from financially-strapped student loan holders.

But Washington better start considering the potential economic fury of its latest monster. Nearly half (41%) of student loan holders have been behind on their payments over the last 5 years, and, last year, a full 12% of borrowers were in outright default on their student loans. At the current rate of growth, the student loan default rate will eclipse the historic maximum default rate for home loans, 14%, by mid-2015.

The mortgage crisis, of course, put us in this terrible economic condition in the first place.

As a testament to the insufficiency of this seemingly-endless economic "recovery", the rate of default on student loans has grown steadily since the 2009 economic bottom, even as the default rates on other types of loans have begun to decline. (Article continues after chart.)

The Student Debt Crisis: Meet The Monster - studen loan default rate chart

Here are some more unsettling facts about the student debt monster from Kyle McCarthy, contributor to the Huffington Post's college section:
Seven Million Defaulted:

Out of the nearly 40 million borrowers, about seven million have defaulted on these student debts. Translation: 7 million (or about 2 percent of the population of the United States) have had their credit trashed as a result of their student loans and can have 25 percent in penalties added onto their total student loan debts. To add insult to injury, about 60 percent of employers run credit checks on applicants before hiring or promoting, making it close to impossible for millions to get a higher paying job to actually repay these debts.

Average Student Debt Increases While Wages Decrease:

Since 1999, student debt has increased more than 500 percent. Unfortunately, average salaries for young people have not. In fact, since 2000, the average salary for young people has decreased by 10 percent. It's no wonder that we are seeing millennials delaying starting families, making car purchases and buying homes.
Delayed life milestones create opportunity costs for the economy.

According to the non-profit American Student Assistance, the origin of student borrowers' repayment difficulties has been the persistently-high unemployment and underemployment caused by the Fed and federal government's last monster, the housing bubble.

As a side note, a buddy of mine recently asked me why student loans aren't dischargeable by bankruptcy like other kinds of loans. I told him that it's because indebted students--unlike investment bankers--have little lobbying power in Dr. Frankenstein's laboratory on the Potomac.

Seth Mason, Charleston SC

8 comments:

  1. Hmmm....hasn't burst yet and I've been hearing about the student loan bubble for a few years now. What's up with that?

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    1. People said the same thing about the tech bubble and the housing bubble.

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  2. How can it pop? Students aren't allowed to default, at least, if the fed gov underwrites the loan. Those mortgage holders did default, as did those tech companies.

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    1. Student debt holders can default on their loans regardless of who underwrites them. The difference between student loans and other types of loans is that you can't discharge them through bankruptcy. But defaulting on those non-dischargeable loans brings severe consequences. Multiply those consequences by a ballooning number of people defaulting.

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  3. I meant discharge then. I suppose anyone can default on anything. Student loans must be treated differently from other loans, from a finance and trading perspective, which may have repercussions on the economy that may be different from other loans, like mortgages for instance. That's what I meant. It may not pop like the other ones did, but if kids aren't paying then lenders are out that money whether they discharge or not.

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    1. The real economic pain from the burst bubble won't be from lenders not getting their money. The federal government underwrites a good many student loans. The hurt will instead come from a critical mass of Americans whose credit will be trashed, whose difficult job search will be made even more difficult because their credit will be trashed, who won't be able to buy houses, who won't be able to buy new cars, etc.

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  4. Pity the young who foolishly voted in the last two presidential elections for much bigger government with much bigger debt and taxes, even as those of them who work will struggle to pay enough in taxes for the burgeoning population people on Medicare, Medicaid, Social Security, ObamaCare with subsidies, the increased ranks on Social Security Disability, on food stamps, and on ever-extended unemployment benefits, while many also pay off their college loans. It will be necessary to savagely beat these donkeys to get them to trudge up that steep mountain. But if you insist on thinking like a donkey, there are consequences.

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    1. Or just not thinking and living for today at the expense of tomorrow.

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