In the past, I have noted how student loan debt in the United States is reaching historically high levels; total student loan debt now exceeds credit card debt. This from the “Milwaukee Journal Sentinel”[1] (emphasis added):
Student loan debt may pose the next mortgage-style economic crisis, according to a report by the National Association of Consumer Bankruptcy Attorneys.
Four out of five U.S. bankruptcy attorneys in a new national survey said potential clients with student loan debt have increased “significantly” or “somewhat” in the last three or four years. About half (48%) of the 860 bankruptcy attorneys surveyed reported “significant” increases in such potential clients.
With student loan debt now topping U.S. credit card debt — and few or no hardship options available for borrowers that include parents who co-signed loans and now face the loss of nest eggs, retirement homes and other assets — America faces the possibility of another major economic threat on par with the home mortgage crisis, according to both a report and survey of bankruptcy attorneys by the National Association of Consumer Bankruptcy Attorneys.
According to the report:
* College seniors who graduated with student loans in 2010 owed an average of $25,250, up 5% from the previous year. Borrowing has grown far more quickly for those in the 35 to 49 age group, with school debt burden increasing by a staggering 47%.
* Students are not alone in borrowing at record rates. Loans to parents for the college education of children have jumped 75% since the 2005-’06 academic year. Parents have an average of $34,000 in student loans and that figure rises to about $50,000 over a standard 10-year loan repayment period. An estimated 17% of parents whose children graduated in 2010 took out loans, up from 5.6% in 1992-’93.
* Of the Class of 2005 borrowers who began repayments the year they graduated, one analysis found 25% became delinquent at some point and 15% defaulted. The Chronicle of Education puts the default rate on government loans at 20%.
According to the survey of bankruptcy attorneys:
* Nearly two out of five of bankruptcy attorneys (39%) said they have seen potential student loan client cases jump 25 to 50 percent in the last three to four years. An additional quarter (23%) of bankruptcy attorneys have seen such cases jump by 50% to more than 100%.
* Most bankruptcy attorneys (95%) report that few student loan debtors are seen as having any chance of obtaining a discharge as a result of undue hardship.
You might be reading this and think that the statement made by the National Association of Consumer Bankruptcy Attorneys is way off – there couldn’t possibly be enough student loan debt to trigger another credit crisis along the lines of the mortgage crisis. If you’re thinking that, take in these facts reported by “USA Today” in October of last year[2] (emphasis added):
Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people looking for jobs and trying to start careers.
The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York, the U.S. Department of Education and private sources.
Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what’s owed on home loans and credit cards.
Taxpayers and other lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can’t be shed in bankruptcy.
The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future.
“Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children,” says Mark Kantrowitz, publisher of FinAid.org.
“It’s going to create a generation of wage slavery,” says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.
Is this really a bubble?
From my experience and interviews that I’ve done with some very bright economists, a bubble has at least three of characteristics:
Number one: it’s symmetrical, taking about as long to unwind as it does to develop.
Number two: prior to the bubble bursting, activity that contributes to the formation of the bubble intensifies and then peaks before reversing direction.
Number three: a bubble cannot continue to grow unless easy credit exists. From my experience bubbles are always fueled by debt.
According to the “USA Today” article, student loan debt doubled over a five year time frame. That meets the definition of number two above. Assuming that this bubble has peaked, according to characteristic number one above, it will take at least 5 years to unwind.
Problem with student loan debt, as stated in the article, is that it is difficult to get the debt discharged in a bankruptcy proceeding. That means that the borrower will be forced to pay off the entire loan. Given that there is over $1 trillion out there in student loan debt, that’s at least $1 trillion that won’t be spent on consumption. That’s not great news for the economy.
[1] Herzog, Karen. February 8, 2012. “Report: Student loan debt looms as next mortgage-style debt crisis.” http://www.jsonline.com/blogs/news/138894784.html
[2] Cauchon, Dennis. October 25, 2011. “Student loans outstanding will exceed $1 trillion this year.” http://www.usatoday.com/money/perfi/college/story/2011-10-19/student-loan-debt/50818676/1
