21/1/18: Student Loans Debt Crisis: It Only Gets Worse

A new research from the Brookings Institution has shed some light on the exploding student debt crisis in the U.S. The numbers are horrifying (for details see https://www.brookings.edu/wp-content/uploads/2018/01/scott-clayton-report.pdf) (emphasis mine):

"Trends for the 1996 entry cohort show that cumulative default rates continue to rise between 12 and 20 years after initial entry. Applying these trends to the 2004 entry cohort suggests that nearly 40 percent may default on their student loans by 2023." In simple terms, even 12-20 years into the loan, default rates are rising, which means that after we take out those borrowers who are more likely to default (earlier defaulters within any given cohort), the remaining borrowers pool is not improving. This applies to the cohort of borrowers who entered the labour markets at the end/after the Recession of 2001 - a cohort that started their careers before the Global Financial Crisis and the Great Recession, and that joined the labor force at the time of rapid growth and declining unemployment.

"The new data show the importance of examining outcomes for all entrants, not just borrowers, since borrowing rates differ substantially across groups and over time. For example, for-profit borrowers default at twice the rate of public two-year borrowers (52 versus 26 percent after 12 years), but because for-profit students are more likely to borrow, the rate of default among all for-profit entrants is nearly four times that of public two-year entrants (47 percent versus 13 percent)." Which means that the ongoing process of deregulation of the for-profit education providers - a process heavily influenced by the Trump Administration close links to the for-profit education sector (see https://www.theatlantic.com/education/archive/2017/08/julian-schmoke-for-profit-colleges/538578/ and https://www.politico.com/story/2017/08/31/devos-trump-forprofit-college-education-242193)  - is only likely to make matters worse for younger cohorts of Americans.

On a related: "Trends over time are most alarming among for-profit colleges; out of 100 students who ever attended a for-profit, 23 defaulted within 12 years of starting college in the 1996 cohort compared to 43 in the 2004 cohort (compared to an increase from just 8 to 11 students among entrants who never attended a for-profit)." So not only things are getting worse over time on their own, but they will be even worse given the direction of deregulation drive.

"The new data underscore that default rates depend more on student and institutional factors than on average levels of debt. For example, only 4 percent of white graduates who never attended a for-profit defaulted within 12 years of entry, compared to 67 percent of black dropouts who ever attended a for-profit. And while average debt per student has risen over time, defaults are highest among those who borrow relatively small amounts." This highlights, amongst other things, the absurd nature of the U.S. legal frameworks governing the resolution of student debt insolvency: the easier/less costly cases to resolve (lower borrowings) in insolvency are effectively exacerbated by the lack of proper bankruptcy resolution regime applying to the student loans.

Some charts:

Data above clearly highlights the dramatic uplift in default rates for the more recent cohort of borrowers. At this point in time, borrowers from the 2003-2004 cohort already exhibit higher cumulative default rates than the previous cohort exhibited over 20 years horizon. Worse, the rate of increases in default rates is still higher for the later cohort than for the earlier one. Put differently, things are not only worse, but are getting worse faster.

And here is the breakdown by the type of institution:

For-profit institutions' loans default rates are now at over 50% and rising. In simple terms, this is a form of legislatively approved and supported debt slavery, folks.

Beyond the study, here is the latest data on student loans debt. Student loans - aggregate - transition into delinquency is highest of all household credit lines:

And the total volume of Student Loans debt is now second only to mortgages:

26/7/17: Panic... Not... Yet: U.S. Student Debt is Cancerous

Reuters came up with a series of data visualisations and brief analytics pieces on the issue of student loans in the U.S. These are ‘must read’ materials for anyone concerned with both the issues of debt overhang (impact of real economic debt, defined as household, non-financial corporate and government debts, on economic activity), demographic and socio-political trends (e.g. see my analysis linking - in part - debt overhang to current de-democratization trends in the Western electorates https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2993535), as well as issues of social equity.

The first piece presents a set student loans debt crisis charts and data summaries: http://fingfx.thomsonreuters.com/gfx/rngs/USA-STUDENTLOANS-MORTGAGES/0100504C09N/index.html. Key takeaway here is that although the size of the student loans debt market is about 1/10th of the pre-GFC mortgages debt overhang, the default rates on student loans are currently well above the GFC peak default rates for mortgages:

The impact - from economic point of view includes decline in home ownership amongst the younger demographic.

But, less noted, the impact of student debt overhang also includes behavioural and longer-term cross-generational implications:

1. Younger cohorts of workers are saddled with higher starting debt positions that cannot be resolved via insolvency/bankruptcy, which makes student loans more disruptive to the future life cycle incomes, savings and investments of the households;
2. Behaviourally, early-stage debt overhang is likely to alter substantially life cycle investment and consumption patterns, just as early age unemployment and longer-term unemployment do with future career outcomes and choices;
3. Generational transmission of wealth is also likely to suffer from the student debt overhang: as older generations trade down in the property markets, the values of their properties are likely to be lower than expected due to younger generation of buyers having lower borrowing and funding capacity to purchase retiring generations' homes;
4. The direct nature of student loans collections (capture of wages and social security benefits for borrowers and co-signers on the loans) implies unprecedented degree of contagion from debt overhang to household financial positions, with politically and socially unknown impact; and
5. The nature of interest rate penalties, combined with severe lack of regulation of the market and a direct tie in between Federally-guaranteed student loans and the fiscal authorities implies higher degree of uncertainty about the cost of future debt service for households.

On the two latter matters, another posting by Reuters worth reading: https://www.reuters.com/investigates/special-report/usa-studentloans/.  Student loans debt is now turning the U.S. into an expropriating state, with the Government-sanctioned coercive, and socially and economically disruptive capture of household incomes.

One thing neither article mentions is that student loans are a form of investment - investment in human capital. And as all forms of investment, these loans are set against the expected future returns. These returns, in the case of student loans, are generated by increases in life cycle labor income - wages and other associated forms of income - which is, currently, on a downward trend. In other words, just as cost of student loans rises and uncertainty about the future costs of legacy loans is rising too, returns on student loans are falling, and the coercive power of lenders to claim recovery of the loans is beyond any other form of debt.

We are in a crisis territory, even if from traditional systemic risk metrics point of view, the market for student loans might be smaller.

21/5/17: Student Loans Debt: The Bubble is Still Inflating

Having covered the latest news on the U.S. household debt continued explosion (see http://trueeconomics.blogspot.com/2017/05/19517-us-household-debt-things-are-much.html) and the ongoing deepening of the long term insolvency within the U.S. Social Security system (here: http://trueeconomics.blogspot.com/2017/05/19517-reminder-social-security-is-only.html), let’s take a look at the second largest source of household debt (after mortgages): Student Loans.

According to the data from the New York Federal Reserve, 1Q 2017 total volume of student loans outstanding in the U.S. was USD1.344 trillion, up on USD 1.310 trillion in 4Q 2016, marking the highest level of Student Loans debt in history. However, the Fed methodology does not include some of the more predatory types of loans extended to students.  This means that other sources report student debt at the end of 2016 to be between USD 1.44 trillion and USD 1.5 trillion (see for example https://studentloanhero.com/student-loan-debt-statistics/).

Setting aside the issues relating to data reporting, even by the official U.S. Fed standards, student loans debt is almost double the U.S. households’ credit cards debt, and is more than 10 percent higher than combined credit cards and HE revolving debt volumes.

Crucially, default rates on Student Loans are currently higher (at 11%) than for any other form of debt (credit cards defaults, second highest, are at around 7.45%).

With an average debt load of over USD36,000 per student, the expected Fed rates hikes through 2017 alone are likely to take some USD 270.00 per annum from household budgets already under severe strain from low income growth, and sky high and rising rents.

Meanwhile, the U.S. bankruptcy code now excludes Student Loans from protection, courtesy of 2005 Congressional decision, presided over by Joe Biden. Of course, Biden’s political machine was supported by one of largest student loans underwriter, the MBNA. President Obama promised to undo Biden’s changes to the bankruptcy code, but in the end did absolutely nothing to keep his promise and, in fact, made matters worse (https://www.bloomberg.com/news/articles/2015-10-14/obama-administration-hits-back-at-student-debtors-seeking-relief).  Subsequently, during his Presidential election campaign, Donald Trump said “That's probably one of the only things the government shouldn't make money off -- I think it's terrible that one of the only profit centers we have is student loans.”  Since election, however, the Trump Administration is yet to do anything on the issue.

In simple terms, American students have no friends in high places… but legislators like Joe Biden can roam free across campuses and events extolling own ethical virtues… for a fee... often paid for by students' tuitions.