Calls for a benevolent suspension of both personal responsibility and accounting truisms (which mandate that one person’s liability is everywhere and always someone else’s asset) in the interest of forgiving all student loans at the expense of the US taxpayer aside, America has a student debt problem. Here are some good places to start if you need a refresher:
- The Treasury's Worst-Case Scenario: Over $3.3 Trillion In Student Loans In A Decade
- The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default
- "Cancel All Student Debt" - The Petitions Begin
As we’ve documented exhaustively in the past, the country is laboring under around $1.3 trillion in non-dischargeable loans to students which isn’t a good thing, especially in a country where the jobs driving the economic “recovery” have, until last month, been created in the food service industry and where wage growth is a concept reserved for only 20% of the workforce. It would seem that this could make it increasingly difficult for students to repay their debt, especially considering how quickly tuition costs have risen. In other words, tuition is going up, wages aren’t, and the latter point there is only relevant in the event you find a job that pays you a wage in the first place (i.e. where your compensation isn’t determined by the generosity of the “supervisory” Americans who can still afford to eat out).
The severity of the problem has been partially masked at times by the tendency to inflate the denominator when one goes to calculate delinquency rates. That is, if you include all student debt outstanding, even that in deferment or forbearance in the denominator, then clearly the delinquency rate will be biased to the downside because the numerator will by necessity only include those students who are currently in repayment. That’s really convenient if you want to make things look less bleak than they actually are.
Of course you can’t be delinquent when you aren’t yet required to make payments, so the more accurate way to calculate the figure would be to include only those students in repayment in the denominator. This apples-to-apples comparison is likely to paint much more accurate picture and sure enough, a new St. Louis Fed (who recently documented the shrinking American Middle Class) study finds that the delinquency rate for students in repayment is 27.3%, well above the 17% figure for all student borrowers. Here’s more:
To further analyze student loan delinquency, and given that many programs allow borrowers to postpone repayment on their student loans, it seems pertinent to study a measure of the share of loans not in repayment. The second figure shows the percent of student loan borrowers whose loans are not in repayment.
Borrowers’ loans are defined as “not in repayment” if (i) their student loan balance is larger than or equal to the previous period (i.e., quarter) and (ii) there is not a pastdue student loan balance in the current period. Note that the “not in repayment” status includes the loans of most student loan borrowers who are still in college. It involves more than that, however, since it also incorporates loans in deferment and forbearance, which are mechanisms that allow borrowers to suspend or reduce student loan payments under certain circumstances. 4 For 2010:Q4, we find that about 45 percent of student loans were not in repayment; this implies that only about 55 percent of student loans were in repayment.
As a consequence, if we adjust the delinquency rate to consider that only a fraction of the borrowers have payments due, this level of delinquency is very concerning: A delinquency rate of 15 percent for all student loan borrowers implies a delinquency rate of 27.3 percent for borrowers with loans in repayment. This level of delinquency is much higher than for any other type of debt (credit cards, auto loans, mortgages, and so on).
Even the fudged denominator figure doesn't look that great with 17% of all student borrowers delinquent...
...and speaking of forbearance and deferment, here's the breakdown by category...
...and here's the trajectory for the size of the bubble under difference economic scenarios...
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So we say again, let the "cancel all student debt" petitions begin because the students are going to cancel it anyway, the same way some homeowners in Florida and New Jersey are canceling their mortgages — by refusing to pay. And as a reminder, once the country's colleges and universities realize that the taxpayer is on the hook when former students don't pay, you can expect tuition rates to go parabolic.
Note that we were the first to warn about the student loan bubble and now, some two and a half years later, even Bill Ackman has come to the same conclusion. Here's what he said about the situation earlier this week:
“If you think about the trillion dollars of student loans we have outstanding, there’s no way students are going to pay it back.”