America's Student Loan To Reach $1.4 Trillion by 2020

EconMatters's picture

By EconMatters


Student loan debt is surging, partly boosted by many who became unemployed during the Great Recession going back to school hoping for a better job prospect.  An analysis by the Federal Reserve Bank of New York (FRBNY) showed that student loan debt stands at $870 billion nationally, surpassing the nation’s outstanding balance on auto loans ($730 billion) and credit cards ($693 billion) as of third quarter, 2011.


Of the 37 million borrowers who have outstanding student loan balances, 14.4%, or about 5.4 million borrowers, have at least one past due student loan account. Together, these past due balances sum to $85 billion, or roughly 10% of the total outstanding student loan balance.




However, the majority of total lending comes from federally backed loans, whose repayment is deferred until the student graduates from school and can then be pushed back by another six-month grace period. So since no payment is due until graduation, these deferred student loans, although included in the total balance, are excluded from the calculation of past due balance. FRBNY estimated that as many as 47% of student loan borrowers appear to be in this bracket.  To adjust for this distortion, FRBNY did an estimate by excluding this class of borrowers, and found 27% of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21%.


A couple of new laws in 2008 and 2010 has made the U.S. government the sole supplier of Federal student loans, rather than just the ultimate guarantor.  That means student loan is now part of the gross U.S. national debt.


Falling state government support for public higher education has put pressure on public universities and colleges to raise tuition and reduce the education quality.  Federal aid is also running dry.  For example, Federal loan subsidies for graduate students will seize in July 2012.  Those federally subsidized Stafford loans for graduate students, which used to not accrue interest until after graduation, will start accruing interest at a fixed rate of 6.8% while borrowers are still in school.  Furthermore, with globalization and rising total labor supply, a college degree can no longer guarantee a high wage needed to pay down student loan.


These factors could conspire to form a vicious cycle pushing student debt higher and higher.  Council on Foreign Relations (CFR) projected the outstanding direct federal student loan will reach $1.4 trillion by 2020 representing roughly 7.7% of gross debt. This is 6.3 percentage points higher than it would have been had the scheme not been nationalized (See Chart Below).


And according to a recent survey by the National Association of Consumer Bankruptcy Attorneys, more than 80% of bankruptcy lawyers have seen a substantial increase in the number of clients seeking relief from student loans in recent years.


All in all, in the near term, perhaps calling student loan the next debt bomb to cause another financial crisis might be a bit of an exageration, since banks are not that exposed to these debt as in the case of the subprime mortage.  Nevertheless, the added weight on the gross national debt as well as the dis-incentive for people to seek better education would prove to be one of the greatest risk for America as a whole.


Further Reading - College Graduates: Too Many in China, Not Enough in America?


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TeresaE's picture

If milk is $50 (or more) a gallon, this debt will be meaningless.

To the government statisticians, sadly, it is going to be a major ass-reaming for the rest of us.

Yet another reason that while talking about "keeping inflation in bounds" the Fed & WDC continue printing $$$, knowing full well that they are increasing costs and stealing from the middle & productive the most.

We will have to have severe inflation because that is the only thing that can "fix" these issues on a national level. 

The trick is going to be to teach our kids to stand up to constant propaganda and really question if the debt is worth the "investment."  And that is only if there are still colleges operating in 2020, with all the stuff going down, I'm really beginning to wonder.


JohnKozac's picture

I wanna get a whopper of a loan to finance my return to education and major in "Women Studies" with a minor in "Art History."

Shouldn't cost more then $168k for the tapxayers....and you get to meet some hot chicks....

TeresaE's picture

Even if I was a lesbian, that is the last place on earth I would look for hot chicks.

Although, remember what they say, "crazy in the head, ..."

Still not worth it to me.  Good luck!

JohnKozac's picture

tereasae, how about weddings and funerals instead of uni? my buddy tells me that has potential but there is no free gubberment moeny in that (at least not yet).

AustriAnnie's picture

if angry feminist hippies who don't shave their armpits are your type

JohnKozac's picture

on second thought...make the art history and ballet....although I warn you, I do not look so hot in a tutu.

AustriAnnie's picture

Stick with art history.

If you do ballet, it won't be the women hitting on you....


bugs_'s picture

unless the higher education bubble pops first.

non_anon's picture

who will still be here in 2020, not me!

Coldfire's picture

Everything the state touches turns to shit.

i-dog's picture


"the dis-incentive for people to seek better education would prove to be one of the greatest risk"

I would rate that as a positive, rather than a risk! Maybe they'd instead try their hand at starting a small business and generating employment, or gaining experience in producing something that would later lead to them generating employment.

A college degree in "Family Studies" is not a particularly bright way of accruing a massive debt, or preparing to generate wealth "for America as a whole"!

twotraps's picture

i-dog, you've got a point.  However, like any good lobby....there are sininster forces at work that gently guide people to college and loans to finance it.    Funny how 'school' has changed....multi-billion dollar operations that are over subscribed to, allowing tuition to rise every year, it has turned out to be one of the greatest business models ever.  There is the heavy implication that their services are needed, with no guarantee of anything, playing on our senttimental memory of 'college' by taking $50k/yr and then having the balls to ask for donations while the endowments grow to complex trading operations.  Northwestern University in Chicagp pays no taxes, its written into the state constition.....but the make up for it with civic contributions bla bla bla.  What a load of shit.  Its another example of an over financialized world.  What busines school student would dare stand up and ask the tough questions??  Arent't the students the 'customers'????  With a 21 month old daughter, I have much work to do teaching her to think for herself, be aware of how the game works, and make the best decisions she can.  Who knows what this will look like in 18 yrs.

AustriAnnie's picture

" Arent't the students the 'customers'????"

They are customers like Goldman Sachs has clients.  The education system is a wealth transfer system from students to teachers unions and system administrators, with some going to the banks for handling the transactions.

Its a smart system.  They get to start extracting money from people before they even become taxpayers (employed), and at the same time guarantee that those graduating will be forced to stay in the debt-wage serf system till their 60's, when they switch them over to the social security system.

twotraps's picture

oh and I forgot to mention all the risk the university has with all the student loans.......Hmmm, easier to get a loan, harder to get out of it, with some legislative help from the govt!  Like the banks pimping off the system throwing up their hands like they did not profit at all from anything!!  I wanna be in the business where there is a free flow of govt backed loans to buy my stuff with no guarantee of performance or results that people Still feel so strongly they need that debt is not a deterrant.

Alexmai's picture

H.R. 4170: Student Loan Forgiveness Act of 2012 – If you make payments equal to 10% of your discretionary income for 10 years, your remaining federal student loan debt would be forgiven; Capping interest rates at 3.4%

AustriAnnie's picture

I don't think the interest rate cap was put in the bill in its final form?

That would also only be for undergraduates (Bachelors).  Grad students pay full interest rates plus an immediate 4% fee the second they take out the loan.  (and since undergrads won't be able to get a job, they will be encouraged to go straight to grad school where they will pay higher fees and interest rates).


Dedwards's picture

Can someone get a bloomberg screen capture of selected SLABS or remits (if there are any for slabs) so we can see exactly what we are dealing with in terms of delinquency etc.

infiniti's picture

$100 Bernanke Bucks on the over.

km4's picture

I want to know who the hell are the 17% aged 50+

aren't you fiscally or financially responsible yet ?

km4's picture

tick tick tick .....boom .....late 1960's revisited