There is absolutely no doubt that US student debt levels are now out of control, fuelled by economic policies in the last decade due to low borrowing costs associated with ZIRP, the lack of wage growth and the rapid growth of low paid jobs. The result of these deficient economic policies is that university graduates are now facing the threat of bankruptcies which will ruin their career prospects due to personal finance issues resulting from the credit fuelled economic expansion which we have discussed many times before.
The fact that US student debt has now reached $1.5tn which is comparable to the annual GDP of Canada demonstrates the severity of the problem, exacerbated by students only able to secure very poorly paid jobs. There are currently around 45 million Americans burdened with student loan debt and the delinquency rate stands at 11.5% for 90+ days delinquent or in default. The average monthly student loan payment, for a borrower aged 20 to 30 years stands at $350 and the average debt for graduates is up 70% over the past decade, to about $34,000. Some argue that figure is actually much higher.
The fact that student debt has tripled in the last decade is indicative of yet another serious issue that has been swept under the carpet. The fact that universities are largely for-profit institutions only adds to student exposure to unmanageable debt levels. In the period 2016 and 2017 tuition fees rose by 9% at four-year state institutions and 13% at what might be termed private colleges.
Recent analysis published by the Federal Reserve has found that graduates in their early thirties have the largest default rate at 39% for four-year courses and 42% for two-year courses. The default risk is deemed lower for students in their 20s because they have less exposure to additional debt such as home ownership and are likely to be covered by parental health insurance. The irony in this is that they are simply unable to afford to buy houses because of poor wage growth and poorly paid jobs.
Whatever we may think about the US economy, which is heavily reliant on the service sector, this enormous student debt bubble is seriously impacting consumer spending due to decreased rates of first time home ownership, higher rental prices and decreased purchases of white goods and associated items that would furnish a house. The knock on effects of the 2008 financial crisis also continues to be felt due to the subprime crisis which has impacted the ability of parents to take out home equity loans to pay for their children’s education.
The fact that student debt is now greater than car loans or credit card debt means that a student debt bubble now exists which is analogous to the housing debt bubble of 2008. It should therefore come as no surprise that student debt is flowing out of the private sector and into the public sector. Before 2007, most student loans were underwritten by banks or other private sector financial institutions whereas today 90% of new loans originate within the Department of Education.
The writing is clearly on the wall as yet another debt bubble spirals out of control, fuelled by the crass QE and ZIRP monetary policy of the Federal Reserve. Sadly those of us who spoke about the abject folly of such policies in the aftermath of the 2008 financial crisis have proved to be correct. Perhaps the most damning indictment was this was hardly rocket science, as common sense dictated this was always going to be the case.