The Student Loan Sweatbox

Student loan debt is growing more rapidly than borrower income.  The similarity to the trend in home loan debt leading to the subprime mortgage bubble has been widely noted. Student loan debt in 1990 represented about 30% of a college graduate’s annual earnings; student debt will surpass 100% of a graduate’s annual earnings by 2023.  Total student loan debt also reflects more students going to college, which is a good thing, but the per-borrower debt is on an unsustainable path. Unlike the subprime mortgage bubble, the student loan bubble will not explode and drag down the bond market, banks and other financial institutions. This is because 1) a 100% taxpayer bailout is built into the student loan funding system and 2) defaults do not lead to massive losses. Instead, this generation of students will pay a steadily increasing tax on their incomes, putting a permanent drag on home and car buying and economic growth generally. Student loan defaults do not result in home foreclosures and distressed asset sales. They result in wage garnishments, tax refund intercepts and refinancing via consolidation loans, and mounting federal budget outlays. In many cases, borrowers in default repay the original debt, interest at above-market rates, and 25% collection fees. In other words, defaulting student loan borrowers will remain in a sweatbox for most of their working lives. Proposals to cut back on income-driven repayment options will only aggravate the burden, further shifting responsibility for funding education from taxpayers to a generation of students.

For the vast majority of student loans, the federal government is the lender, or the guarantor. The taxpayer bailout is already built in. The small private student loan sector consists mostly of very high credit score, high income borrowers with solid jobs. Goldman Sachs, for one, is bullish on the prospects for securitized private student loans.

Most defaults do not lead to losses because of the robust collection tools Congress has given the U.S. Education Department. Student loan borrowers in default end up paying, sooner or later, through wage garnishments, federal income tax refund seizures, and consolidation loans. Administrative wage garnishment (no court order required) take 15% of a borrower’s after-tax income. Tax refund intercepts take 100% of the most common form of annual savings, year after year. Borrowers who want to avoid these taxes can in some cases get a consolidation loan, capitalizing all unpaid interest and collection fees into a new loan, restarting the payment clock for another 20 to 25 years, perhaps in an income-driven payment plan at 10%, 15% or 20% of their discretionary income.

In recent years however, US Ed.'s recovery rate on defaulted loans has declined from nearly 90% to around 75%. Until 2015 the interest paid by successful borrowers, especially graduate student and parent loans, more than offset losses on defaults and discharges. For the past three budget years, losses from defaults and  income-driven repayment discharges are projected to outstrip interest earnings. This means that taxpayers will share somewhat more in funding student loan debt, although Administration budget proposals now seek to reverse that trend by reducing income-driven repayment subsidies.

The only way out of the sweatbox for borrowers are 1) bankruptcy discharges granted based on “undue hardship”, a very tough standard, 2) discharges based on death or permanent disability, and 3) write-offs of balances after 20 or 25 years of income-based repayment, or shorter periods for some public service loan forgiveness programs. These write-off amounts are modest now, but are growing as the bubble grows.

Instead of a 2008-style crisis, the student loan bubble will be a permanent and heavy drag on economic growth. An entire generation of borrowers cannot buy homes or cars, and will have their spending permanently impaired. When a tipping point will be reached, and when that generation of borrowers will take up their pitchforks, is impossible to guess.

Comments

[FJP]

This is why we need to undo credential inflation and create more paths toward good entry level jobs without requiring college degrees.

Ironically, also, I think we fail to recognize that so long as college costs are funded through nondischargeable loans that are granted liberally with minimal regard to creditworthiness, we may actually be creating a vicious cycle that drives up college costs. Colleges have become businesses whose customers are being "given" whatever it takes to buy their "product", so we should not be surprised that prices keep rising.

[UserFriendlyyy]

My whole life has been one big experiment in national policy trying to ruin my life and/or kill me. I graduated in 2008 with a Chemical Engineering degree and $120k in public and private student debt. It took 4 soul crushing years of working 60 hour weeks at 3 part time jobs before I got a job in my field, all the while piling on credit card debt to cover living expenses so I could make loan payments. Income based repayment would have increased the amount I had to pay because it ignored all the rest of my debt payments. Thanks to the Wall Street dems teaming up with the GOP and passing bankruptcy reform (again, after I had already signed for loans) bankruptcy was not an option. When I finally did get a job in my field it payed $20k/yr less than the average starting salary when I signed for my loans. Even after 4 years and several salary bumps I still was nowhere on paying down my debt and a massive bout of depression kicked in. That started showing in my work and eventually I got let go. I’m trying to dig myself out of that pit and deal with essentially PTSD from my first job hunting experience and now the government wants to kick me off my antidepressants and ADHD meds with medicaid reform.

All this because we have two right wing parties that don’t understand how fiat currency works. Neoliberalism really does have two rules.
1. Because Markets.
2. Go Die.
https://www.nakedcapitalism.com/2014/03/neo-liberalism-expressed-simple-rules.html

My issue is with Bill Clinton for signing GLBA and CFMA as presents to Wall Street, with Bush Jr. for appointing non-regulating regulators and signing Bankruptcy reform, and with Obama for doing literally the bare minimum to reform the system and not helping anyone who wasn’t a millionaire.
http://www.newsweek.com/why-cant-obama-bring-wall-street-justice-65009

I blame the whole lot of them who benefited from VERY heavily subsidized college and due to their complete lack of understanding of fiat currency decided to end those subsidies and make my generation bare all the risk of paying for education. The whole BS notion that I should have skin in the game so that I would go into a lucrative field is insulting. Not to mention that it only works when you don’t also lock the escape hatch with bankruptcy reform so even when I can’t repay due to no fault of my own I don’t end up with a ruined life. Just by graduating in the wrong year I lost well over $100k in lifetime earnings.
http://www.imf.org/external/pubs/ft/fandd/2012/03/morsy.htm

Because somehow after a few years of college I was supposed to notice that congress made it impossible for me to declare bankruptcy, that Wall Street had taken advantage of Bill Clinton’s pointless surplus and created MBS (Mortgage Backed Securities) to offer investors who would have happily bought bonds, that the demand for MBS was so great that Wall Street was giving out NINJA (No Income No Assets or Job) mortgages just to be able to sell more MBS, and that that whole house of cards was going to come crumbling down and destroy the job market just as I was graduating. I should have taken that into account and just dropped out. Unfortunately I was busy trying to get good grades and I’m not psychic.

I should have known that Citibank got to staff Obama’s cabinet.
http://wallstreetonparade.com/2016/10/wikileaks-bombshell-emails-show-citigroup-had-major-role-in-shaping-and-staffing-obamas-first-term/
Because after all, that is what they paid for. I was just one of the 225 voters in MN that gave the Democrats a supermajority in the senate, for all the good that did.

I blame this lousy country that went from seeing investing in infrastructure, education, and research as tools to improve the lives of all it’s citizens to a stingy oligarchy that only cares about handing out favors to the highest bidder. Both parties are so thoroughly corrupted by their donors that they completely ignore the needs of everyone else. That is why we have more Americans killing themselves on opiates every year than died in the Vietnam and Iraq wars combined. We propagandize people with BS about pulling yourself up by your bootstraps and achieving the American Dream while at the same time making it functionally impossible for all but the luckiest to do that. This is no meritocracy. When I graduated college about half my class had jobs lined up. Not the smartest kids though, just the ones with family connections; the ones who really didn’t need it because they didn’t have to take on debt for school.

The worst part is that with the economy imploding under Bush Jr’s watch Obama would have had to shoot someone on 5th avenue to lose but he gleefully took Wall Street’s money anyways. He sold out the country, his voters, and the whole world’s economy for absolutely no reason. He will go down as one of the worst presidents in history, on par with Hoover. The only reason he won reelection is because the GOP nominated the monopoly man. It was the Wall Street cronies in his inner circle that argued for a smaller stimulus fearing imaginary bond vigilantes, that stopped him from nationalizing citibank, that designed HAMP to ‘foam the runways’ for banks, that decided none of the criminals whose greed blew up the economy needed to get fired, much less jailed.

Hillary went down in flames because she was busy touting a recovery that never hit anyone but the top 10%, and that 10% will always vote for tax cuts no matter how vile the person offering them is. The other 90% couldn’t handle more of the same. If someone running on Bernie’s no money from billionaire’s model doesn’t win in 2020 go long in Guillotines. “Those who make peaceful revolution impossible will make violent revolution inevitable.” -JFK

My generation will be the first to do worse than our parents and if that wasn't bad enough we will be dealing with at least 6 feet of sea level rise by 2100 and extreme weather on top of it. It's almost like the previous generation said 'hey the great depression looked like a blast, let's go back to that economic model but completely refuse to admit that is what we did.' Just about every influential economist since Reagan deserves to be rounded up and shot.

[Luke S.]

I can reassure you on one thing, at least. I'm a geologist, and the whole idea of humans causing significant levels of global warming is hooey. Try looking up the East Anglia mass data faking, or the current scandal at NOAA. The Earth is just too large for puny us to matter much. (Hint: astronomic cycles are what mainly matter, even ahead of the periodic nontrivial volcanic eruptions.)

Luke S.