…and this one will be an F5
We all know about the housing bubble, we’ve been living through it for seven years and we’ve got at least another five to go. Then there’s the national debt bubble that only a few people are actually talking seriously about and the nation passed the 100% debt to GDP mark earlier this year. And the public employee pension funds that are underfunded by trillions.
Now there’s the bubble nobody wants to talk about, student loans.
The general public doesn’t really know a whole lot about student loans, including those who are taking them out, so let’s start out with some baseline information about student loans. This is by no means meant to be “complete” it’s simply a general baseline.
- There are generally three types of student loans available to college students.
- Subsidized loans are guaranteed by the federal government, do not accrue interest to the borrower as long as the borrower is in school – the federal government makes the interest payments – and do not require credit qualification.
- Unsubsidized loans are guaranteed by the federal government but do accrue interest to the borrower from day one. As with subsidized loans no credit qualification is required.
- Private loans. These are credit qualified loans, accrue interest at a market rate and require credit qualification.
- In the case of “dependent student” as defined by the Department of Education – generally under 25, no dependents – parents may be required take out an additional loan called a Parent Plus that is credit qualified and not subsidized.
- No payments are due on student loans until as much as six months after leaving school, whether or not the student graduates.
- Loans that are guaranteed do not require qualification, they are “sign & drive”. They also are not dependent upon the student’s major, future income potential or academic performance.
- The cost of higher education has risen in direct proportion to the amount of available federal student aid over the past 30+ years and has outstripped inflation by a factor of about ten.
- In an effort to leave no available dollar unspent, have bloated themselves with administration. In California, the instructor-to-administrator ratio was about 3:1 thirty years ago. Today it’s slightly over 1:1. Needless to say, administrators add exactly nothing to the academic experience of a student.
Let’s look at the size of the tidal wave. Student loans hit one trillion dollars this year and that, according to the Wall St. Journal, is 16% higher than a recent estimate by the Federal Reserve Bank of NY. There are a number of reasons that the bubble has accelerated, one is people going to school because they can’t find a job and have the perception that a degree will open doors for them. That may or may not necessarily be true and we’ll look at a painful example in a minute. The second prime reason for the increase in loan volumes is the financial problem the states find themselves in, trying to juggle the pension funding requirements foisted on them by selling out for decades to public employee unions.
ZeroHedge exposes the problem with student loans. The bottom line is this:
- The outstanding balance of student loans is over one trillion dollars.
- That balance is growing at a rate of about $50B per month.
- About 27% of allborrowers are more than 30 days delinquent and a simple extrapolation would indicate as much as $270B are seriously past due.
- Given that no payments are due if the borrower is still in school, the 27% delinquency is seriously understated.
- If you factor out the students, you find that just over half (53%) of borrowers are actually required to pay on their loans which means that about half of currently due loans are over 30 days in arrears. Half.
- Current interest rates are at historic lows and will go up, which will exacerbate the problem.
- The current unemployment rate for adults 18-24 is 46%, exactly the same as Greece and just a tad better than Spain. This is the highest unemployment rate in 64 years and 7% worse than when Obama took the oath of office. Change, no hope.
Here’s what a worst case example looks like, courtesy of John Balkin.
The average indebtedness figures for 2011 law graduates are stunning. Last year, 4 law schools had graduates with average debt exceeding $135,000. This year 17 law schools are above $135,000…
What’s remarkable is that the majority of graduates from these law schools–with the exception of Northwestern–do not obtain jobs with salaries sufficient to make the monthly loan payments due on the average debt. At some of these schools 90% or more of graduates with debt do not earn enough to make the loan payments on this level of debt…
Please note that the student loan figures that Balkin quotes are for law school only, they do not include loans that may have been (and probably were) taken on for undergraduate work.
Student loans are a real disaster and they have the potential to make the housing bubble look like a blip. The primary reason is that government guaranteed student loans are not dischargeable in bankruptcy. In other words, if you default on the debt, the government – or its collection agencies – have the right to garnish your wages, your credit will destroyed and your financial future is cloudy, at best. Even the schemes put forth by the administration to limit payments to 10% of your income for ten years and then write off the balance aren’t necessarily much help because your credit score still gets hammered and the write off is treated as ordinary income and is taxed.
The Wall St. Journal highlights just a fraction of the damage that student loan balances are going to do…
But as more people go to college and assume bigger loans for education, they may take longer than previous generations to hit key milestones such as buying a house or getting married, U.S. officials and economists say. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.
Rohit Chopra, student-loan ombudsman for the Consumer Financial Protection Bureau, said student debt could ultimately slow the recovery of the housing market. “First-time home-buyers are a substantial part of the housing market,” Mr. Chopra said in a speech at the banking conference in Austin. “Instead of saving for a down payment, these borrowers are sending big payments every month.”
Note that even if today’s student loan borrowers take advantage of the ten year and write off plan, their balances are being paid with borrowed money that they are on the hook for.
What we, as a nation, are doing is saddling our children with a veritable mountain of debt and our elected officials are, for the most part, either doing nothing to stem the bleeding or, in the case of the President and his lackeys, are accelerating the pace and volume of spending. It’s time – past time, actually – to pay attention to and support courageous legislators like Paul Ryan or the Tea Party Senators who are actually addressing the problem.
In conclusion, I want to leave you with a picture of just how out-of-control higher education cost is. Just as legislators must be held accountable to make real cuts in spending, the people running colleges and universities have to be introduced to the real world in a harsh manner.
Here is a chart of the growth of senior management in the University of California system…
And this is what the cost of college looks like compared to home prices and the Consumer Price Index…
Here’s a Fundamental for you: That which can’t continue, won’t.