A few days ago, student loan debt in America crossed over the $1 trillion level, making it the largest debt currently held by US households. This rise in debt also signals a new change in consumer borrowing which had been going down since the credit crisis of 2008, and the crash of the housing bubble.
However, even as this new debt borrowing has created it own bubble in the economy, that bubble appears to be short lived, and itself bursting. On March 25th, the Fitch Ratings Agency came out with a staggering report that shows nearly one-third of student loans are now at least 30 days delinquent in repayment, and the growing number of students unable to pay on those loans is increasting rapidly.
Fitch discloses something rather troubling, namely that of the $1 trillion + in student debt outstanding, “as many as 27% of all student loan borrowers are more than 30 days past due.” In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable. It also means that if the rise in interest rate continues, then the student loan bubble will pop that much faster, and bring another $1 trillion in unintended consequences on the shoulders of the US taxpayer who once again will be left footing the bill. – Zerohedge
Student loans today are primarily backed by the US government through a myriad of programs that replaced Sallie Mae and other private financial institutions after President Obama took office in 2009. This change creates a two-fold problem for the American people as students become unable to pay off these massive debts, as the cost of education is rising much faster than the rate of inflation.
First, all student loans are now backed by the taxpayer in loan programs created through the US government. This equates to $1 trillion in loan obligations, that are funded now through additional debt borrowing by Congress, and are on the books as money to be paid back in maturing treasuries. Secondly, unlike tax debt, or other forms of consumer debt, student loans cannot be discharged through bankruptcy due to legislation passed by Congress within the last five years, and it creates a financial burden on students that can stay with them for as much as 10 to 20 years of their working lives.
Unfortunately, the ability to find a good paying job after graduation is declining, as the unemployment rate since 2007 for Americans aged 18 to 24 is over 16%, and for returning veterans it is closer to 30%. Couple this with recent BLS job reports that show the majority of new hires are in low paying temporary positions, and the potential for graduating students to pay off their student loans and create a basic standard of living for themselves is decreasing.
The Housing bubble began in the middle 1990’s and lasted until 2007 when the credit crisis brought the US banking system to the brink of collapse. Low interest rates, coupled with the Federal Reserves monetary policies that vastly increased our money supply helped fuel this anomaly. The same is now occurring in the student loan realm due to an increase in monies available through the Federal government, and that bubble is bursting much faster than housing did since the economy never recovered the 8 million jobs it has lost since 2001. With nearly one-third of all current student loans now in some form of delinquency, the future is no longer bright for the graduating generation of tomorrow.