Are Soaring Student Loans The Best Economic Indicator?

Tyler Durden's picture

Last night, Goldman entered into unchartered territory with its first observations of the student loan bubble in a piece titled "Are Student Loans Driving Consumer Credit Growth?" Most of the observations are nothing new, although author Alec Phillips does bring up one amusing implication of what the soaring student debt may mean in macro terms. Specifically, to Goldman the rise in debt is merely "A more important source of countercyclical credit. Since federal student lending standards are looser than most other forms of credit, they now rely mainly on Treasury borrowing for financing, and demand for them appears stronger when the labor market weakens, it seems likely that education-related debt will grow fastest at times when the economy slows and other lenders are pulling back." In other words, the rate of change in student debt is inversely proportional to the improvement in the US economy, or directly proportional to its deterioration. So since the student debt chart is, for lack of a better word, parabolic, what does that mean for the broader economy?

Source: Name The Bubble

Below are some of the other implications of the student debt bubble according to Goldman. All are oddly spot on:

  • A potential offset to lost savings. Declining home values and tight lending standards mean that households cannot finance college education through home equity loans and home equity line of credit as much as they did during the housing boom. Part of the rise in education-related borrowing may also be attributable to declines in financial investments; statistics released by the College Board indicate that total assets in college savings ("529") accounts grew by 32% from 2007 to 2011, compared to 182% from 2003 to 2007 (some of the earlier growth may also be due to the fact that these accounts were only established by Congress in 2001, and thus grew quickly in their early years).
  • A potential burden on younger consumers and homebuyers. While educational loans can potentially offer economic benefits, the growing share of recent and soon-to-be graduates with student loan debt could also negatively affect consumption and the macroeconomy. For example, Dynan (2012) uses household-level data to show that all else equal, households with a higher fraction of their income going toward debt service payments also experience slower consumption growth. In an environment where lending standards are tight, individuals with significant educational debt may also find it difficult to obtain a mortgage to purchase their homes or have to pay a higher interest rate to secure a car loan. In addition, Gicheva (2011) finds that student loans decrease borrowers’ long-term probability of marriage, which could negatively affect household formation.
  • A potential fiscal risk, which may at some point prompt a tightening in lending. Like other federal credit programs, the cost of student lending programs is accounted for using a framework specified under the Federal Credit Reform Act of 1990 (FCRA), whereby the net present value of cash flows over the life of the loan is discounted at the Treasury's effective borrowing rate; this estimated cost is counted as federal outlays in the fiscal year in which the loan is originated. Because of the difference in the Treasury's borrowing cost and the interest rate paid by student borrowers, these estimates typically show that each dollar lent under these programs generate a profit for the federal government. The assumption used in the President's most recent budget is a negative subsidy rate of 21%, i.e., a profit that reduces the reported deficit by 21 cents for each dollar of student loans disbursed in the fiscal year. However, given the elevated delinquency and default rates among borrowers--federal projections already assume significant defaults--this methodology may understate the cost to the federal government. The Congressional Budget Office has estimated that using a market-based discount rate, loans expected to be originated over the 2010-2020 period would be estimated to cost $52 billion, rather than save $68 billion as is estimated under official projections (see "Costs and Policy Options for Federal Student Loan Programs" Congressional Budget Office, March 2010). Given the magnitude of the federal deficit, whether these lending programs cost or save this much is not a primary issue for the fiscal outlook. That said, the accounting methodology for these loans currently provides the government with little incentive to restrict lending, but if costs begin to mount in the future, could prompt a shift in policy and a tightening in standards.

And the punchline:

The upshot is that the increases in consumer credit since 2010 are largely driven by student loans even after appropriately accounting for the recent shift from non-federal lending to federal lending. The rise in education-related debt has probably offset the pullback in other areas of consumer credit that occurred after the financial crisis, but does not come without its own risks.

Any wonder then why JPM is getting fast out of this latest debt-bubble?

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SheepDog-One's picture

I may look like Im just lounging around the apartment in my bathrobe and bunny slippers, but I'm ACTUALLY getting my MBA in economics online, paid for by gubment loan, and Im gonna be the next Bernank!


SilverTree's picture

I tend to look at the exchange rate of silver or gold adjusted for inflation as an economic indicator.

Chuck Walla's picture

It means more desperate people looking for ways to stay financially afloat as they await the firing of the Big Zero in Chief.  Then, they may have some hope for something more than this depression.

Harbanger's picture

Any School that may actually teach you something would have the following Statement of Loan Policy - Due to our independence from Government assistance, federal loans are not made available.

dougngen's picture

do they teach you to be a Kensian economist?

Cast Iron Skillet's picture

as soon as you grow a grey beard ...

francis_sawyer's picture

It costs a lot to get into a "Girls Gone Wild" video these days...

Village Smithy's picture

Massive student loans are just stealth unemployment payments. It keeps money (borrowed from the future) flowing into the economy but the recipient is not part of the jobless numbers. It's brilliant. Until it isn't.

Bam_Man's picture

Give that man a cigar!

This whole student loan charade is a case of "We'll pretend we're lending you the money and you pretend you will pay it back". These loans will never be paid back and everybody knows it. It's really an unemployment stipend.

LetThemEatRand's picture

Except they are generally non-dischargeable in bankrtupcy.  They will be paid back even if it takes most people their whole lifetime to do so.  Just think how great that will be for the economy in the coming decades, as more and more people in their peak earning years are sending off huge checks each month to pay back loans for their 20 year old diploma, rather than buying new BMWs.  

ChrisFromMorningside's picture

I think he was implying that law will eventually be scrapped, for precisely the reasons you state (the massive wealth sink it creates for an entire generation). 

NotApplicable's picture

Never happen. Slaves are never set free. NEVER EVER!

Same thing with "mortgage relief."

These are just political ideas to fight over in order to engage the apathetic class, sheeple voters.

trembo slice's picture

I work for my Congressman right now, and we get calls all the time asking us to sponsor the Student Loan Forgiveness Act.  It drives me nuts that people think that this is a viable option.  If people get 20,000-100,000 in debt forgiven (and not considered income by the IRS) I want my fucking check.  It would absolutely punish people that have made prudent decisions and not accumulated massive amounts of debt for an overvalued degree.

Hohum's picture

Trembo Slice,

Like it or not, massive forgiveness of debt is probably the solution.  Unless you want hyperinflation, of course.

trembo slice's picture

I realize that our system is set up to benefit debtors at the expense of creditors, and turn the capitalists system upon its head.  It is just infuriating the injustice of the system.

I think the route TPTB will likely continue to take is inflation... since the men in charge are hysterically frightened of a healthy deflation of overvalued assets (including a degree).  As long as people don't wake up to what is going on, they will inflate.  It allows the government to cheat debt.

I just wish policy would quit subsidizing people's ability to go into debt, thereby forcing meaningful reforms instead of letting the system to get out of control. 

NotApplicable's picture

Divide, conquer, rinse, repeat, ad infinitum.

ChrisFromMorningside's picture

Let's recap. Education expenses have skyrocketed over the past two decades due to government policy and central bank actions, which the typical 20 year old has zero control over. Private banks conspired with the federal government to create a monumental debt bubble that funneled hundreds of billions of dollars in subsidies and loan-guarantees from the public treasury to private lenders. Baby boomers dumb down education in a decades-long process that began long before most college students were even born.

Elsewhere in the world, one nation (Iceland) goes through a quasi-debt jubilee and ends up restoring sanity (and independence) to their fiscal and monetary policy and returning to economic growth. Another (Greece), doubles-down on the debt charade and ends up going into a death spiral, hits historic unemployment levels and loses their democratic rights by having an unelected Goldman Sachs stooge installed as Prime Minister.

And out of some idiotic and petty sense of resentment you want our nation to go down the Greek path? All because you didn't have the wonderful privilege of paying exorbitant prices for a dumbed-down education as part of a system that was only put into place so private banks could fleece the public treasury? And you put the blame for this all on 20-somethings with practically no political power all because they had the utter gall of trying to get an education?

Meanwhile, you're sucking off the government teat with your taxpayer-funded salary and you work for the institution (Congress) that is responsible for putting this whole aforementioned^ system into place to begin with.

Wow. What a fuckin' tool. No wonder this country is so screwed. 

Slewburger's picture

Its called atonement, there must be mercy but also justice.

I can understand Kimbo's stance. I ate Ramen noodles in college until i developed an MSG allergy. I worked. I was poor, starving poor. MY CHOICE. I could have borrowed more, partied, eaten out. Hell I had plenty of friends that did.

If someone went to school and borrowed xxxx dollars, they are obligated by contract. But lets be real.... the debt should be purchased by a collection agency, the credit scores should reflect it and the negotiations can commence for a reasonable payoff amount.

This is the entire problem with the financial sector, bad debts are not recognized, not actualized into losses.

If people want laws, they should focus on the future, not themselves. Schools should be upfront with students, as well as the loan paperwork... stating that the loans are not discharged ever. And for every $ of federal load debt they receive; x% will be put up by the school towards scholarships.

I had a family friend commit suicide because of educational debt. It ruins lives and it is inescapable.

I have a younger friend that is 250k in the shitter on her way to a JD.... I've never told her that story, and wont.

trembo slice's picture

Whoa there snappy.  I'm a 20 something year old, study Austrian economics and therefore haven't taken on debt up to my eyeballs to pay for an overvalued education.  I'm a temporary intern making basically no money.  

Haha, dude, your angry post is literally cracking me up... seeing as you have me all figured out.  To be fair, I should have added the /sarc after my "I want my check" comment.  I certainly would resent bailing out anyone for making terrible decisions.  I don't know maybe it's the Libertarian in me that thinks people reap what they sow.  Being educated is not synonymous with going to college.  

Also, without the Fed continuously buying up US Treasuries Congress would be forced to make more fiscally responsible decisions.  I totally agree that Congress is inept, but let's not forget that what makes this entire shitshow possible is the absence of sound money.

haha, and yes ChrisFromMorningside... I'm your one downvote. 

Road Hazard's picture

Trembo Slice, it drives me nuts that GM, Chrysler and banksters got bailed out by the US tax payers for failed business practices. Rather than let capitalism (what all politicans hail as the 2nd coming of Christ) do its thing and let them all fail, they lined up for some US, prime A fiat currency. Moron in chief, george 'dubya bush wrote the first few checks and obummer continues writing them til this day. You are a tool if you work for anybody in government. Also, I want my fucking check and I want my underwater mortgage fixed!

AustriAnnie's picture

Students are also being encouraged to get onto the food stamp rolls, because if they are on food stamps or other government assistance THEY CAN DEFER their payments (which means the students don't have to pay back the $, but they don't technically "default" either)


1)unemployment is really worse than reported, since students are not counted in "jobless" statisticss

2)default rates are really worse than reported, because students on "assistance" are technically just "deferring" not defaulting.

3)not only are these students not getting jobs to pay back their student loans, they also can't fund social security or get us out of the debt hole we're in, and even worse, they are instead ADDING to the debt and entitlement burden

Free2Speak's picture

My hairdresser says her 20-year-old daughter's friends, who have jobs, are all signing up for food stamps so they can save their cash for other things, like smartphones.  Disgusting.

trembo slice's picture

"Now since man is naturally inclined to avoid pain — and since labor is pain in itself — it follows that men will resort to plunder whenever plunder is easier than work. History shows this quite clearly. And under these conditions, neither religion nor morality can stop it."

- Frederic Bastiat 

HungrySeagull's picture

It is not difficult to register and get student loans in the thousands of dollars over a year or so.

Then turn around, audit the classes after a month and then use the rest for cash.

It is in effect a cash cow for people unconcerned about the "Future" when they cannot eat today.

blu's picture

Indeed. It's one way to deal with your UE benefits running out at the far end of the 99 week tracks.

These loans will never be repaid. An insolvent government will then be forced to roll them off-balance-sheet into a bleak future until the end of the world.

NotApplicable's picture

Like all other debts, I'm guessing they'll be the basis of the next "New & Improved" fiat, the Globo (or whatever it's called).

Since debt is now money, there's no way they'll let it just evaporate. Instead they're gonna ZIRP sovereign debt service costs down to nothing. It will only stop when people refuse to accept it as a form of payment.

engineertheeconomy's picture

Interest is unpayable. Unless you borrow the interest payments. Which just means you will owe even more money. The gubermint / bankers are all ponzi scam artist  criminals. Entities like GOOGLE that do nothing to expose them are in on the con too. Perpetual debt and slavery as a system of gobmint is not democracy, it's slaveocracy. Our country is under attack by the Federal Reserve and the rest of the scumbag bankers.

Why is our military doing nothing about it?

I mean, if our military won't stand up to our attackers, why do we even bother having a military?



Dapper Dan's picture


 that there, what you just said, is several lines of some great stuff!! 

I do know the FED/RES has a well armed police force.


TheGardener's picture

Another robot. No trader no troll. Automated responses in suspense, such the training thereof. Don`t fall for it , they still just feed on feeding their supposed trolling.

The programmers thereof ain`t stupid, real and clever human responses to get you off guard?

ChrisFromMorningside's picture

"I mean, if our military won't stand up to our attackers, why do we even bother having a military?"

The Founding Fathers warned us that a standing army was one of the primary threats to liberty and democracy. Remember that the next time you see a neocon "conservative" waving the red, white and blue and calling on the U.S. to kill some more Muslims. Totally antithetical to the values the Patriots fought and died for. 

The army should be as minimal in size as possible and should be focused on domestic border defense, not global police actions. Citizens should have the right to arm themselves without any government limitations. Open-carry should be the norm in all 50 states. The federal government should be *extremely* limited in its ability to charter new law-enforcement capabilities, which are the right and responsibility of state and local governments. THOSE are the values of 1776!

HungrySeagull's picture

I hate to say this but we got in "Up to our Ears"

I love our Military, they are some of our best and brightest. However it is fucking time the OTHER Nations on the Earth to look to their own Defense; however small it may be as happened in the recent Russia/Georgian war...

Student loans will go away when a tipping point is reached. And it will happen sometime in the next decade.

College towns will become ghost towns. Remember that you can build nice buildings with wonderful accommodations for the students to keep them coming.

However a Generation will grow up having watched mommy and Daddy sit home on govt checks despite college degrees that are worthless.

That will be the Generation that wont go to College at any price.

Cursive's picture

Our collective population is playing whack-a-mole with it's funding sources. People are desparate and money is getting more and more scarce. The end game is defualt or deflate.

blu's picture

That is indeed the end-game. The board has evolved to that end, the pieces are in motion, feelings have no part to play.

The puppet masters have already glimpsed the board at the end. And you and I are not on it.

Make your plans accordingly.

Harbanger's picture

If feelings had no part to play, we wouldn't be in this fckng financial mess.  Puppet master:  I am your knight in shining armor coming to your emotional rescue....Buhaha!

Harbanger's picture

Banks were given a sht load of our money but they're afraid to lend it.  So money is scarce.  Low interest yes, but see if you qualify with the depressed values and income.  Some of my friends had equity lines of credit that were recinded before they were even close to maxed out.  I see deflation and buy what I can before they raise rates and open the $ dam gates again, then it's hyper time to buy/sell in the frenzy and get heck out of fiat. 

Jason T's picture

got to give credit (pun intended) to mish shedlock for far better cutting through the consumer credit BS ..

bob_dabolina's picture

Why is the government involved in such pervasive predatory lending?

Eric Holder will need to investigate himself when it comes out that blacks aren't able to pay back their student loans, perhaps he may even need to sue himself.

Harbanger's picture

Not too long ago, "Professors" driving cabs was something only seen in failed socialist countries with "free" state-education (for those qualified).  We've been slowly progressing to know what the rest of the World felt like.

ChrisFromMorningside's picture

An individual I know went in for a group interview for a bank-teller position. There were 3 PhD's among the 10 interviewees. 

In Greece, it's not uncommon for PhD's in engineering to be working as fruit-vendors in the local market. 

i_call_you_my_base's picture

"For example, Dynan (2012) uses household-level data to show that all else equal, households with a higher fraction of their income going toward debt service payments also experience slower consumption growth. In an environment where lending standards are tight, individuals with significant educational debt may also find it difficult to obtain a mortgage to purchase their homes or have to pay a higher interest rate to secure a car loan."

Good thing we have GS to help us figure out the implications of debt.

That they even feel a need to say it is sad.


Free2Speak's picture

How much does he get paid to state the obvious?

xela2200's picture

The government is debating to not allow people with too much student debt from leaving the country. I can already see Mexicans crossing the border meeting over burden students going the other way. Maybe sharing some water, best places to eat, gardening tips, what have you. What a crazy world it is turning into. It is just funny how the US government thinks that people are just going to every command they issue.

SimpleandConfused's picture

Why is that funny.  Do you see anything in our behavior to challenge that assumption?

Free2Speak's picture

Yes, they are seeing the writing on the wall and are barring the exits.  Also, if you have $50 in unpaid taxes, you can't leave the country.

I predict that the Great Obama will "forgive" all the unpaid student loan debts --on one condition: you serve in the military for a few years.  Uncle Sam needs fresh recruits to keep the war machine going.

rabbitusvomitus's picture

Soooo, this is how the future generations of our country finally and irrevocably give up their freedom, via government student loans that CANNOT be defaulted on. When they graduate from institutions of higher learning (sarc) the IRS will garnesh their wages if they try and walk away .. unless you agree to a lifetime of government servitude... oh wait a minute aren't they one in the same..

SimpleandConfused's picture

Economy?  Who cares anymore.  Apathy reigns supreme.

But the market?  Easy answers.  BTFD.

But when do you sell, you might asked this simple and confused man.

Another easy answer.  Sell when the fed says things are looking better.  Then short when he says he might have to tighten.

I have learned so much from ZH.  First, disasters in world economies just don't happen so long as a population is entertained.  Doesn't matter if there is recession or depression, people who have TV and soccer to watch and beer to drink will never really give a good rat's damn.

Secondly, when the markets are nothing more then a mechanism for the fed to get his boss re-elected, then just do what the fed says and BTFD.  There you go; easy money!

poopyjim's picture

Student loans are just another form of unemployment benefit. Anyone can get them and paying them back is only required if you have an income, and even then it's mostly socialized. Out of a job? Go back to school. What a joke. If I get laid off I'll just spend the next 20 years getting like a dozen masters degrees whilst partying my arse off.

Wonder what the unemployment chart would look like without this student loan welfare.

krispkritter's picture

I know several people who are nearing 30, never held a real job, are 6-figures in debt, and just 'leaving' college. Well, that was until they found out there are no jobs paying what they need to survive and are now considering going back 'inside'. I have a relative who's nearing 40, has I don't know how many degrees, has never had a job for more than a year, and is still in college. It's not just a piece of paper! It's a lifestyle!