The student loan crisis

The student loan situation is critical, and the WSJ (subscription required) suggests that there are increasing worries that a large number of borrowers will default. The numbers are indeed concerning with 43% in default already, delinquent or in postponement as shown below.

This has had strange implications. But while I think that the increase in student loan debt is part of the increasing inequality in the country, and one might add, the increasing costs of college education, that forces kids to borrow large amounts for a shot at a better life, it's unlikely that it would lead to a short run crisis, and a recession. In contrast to the sub-prime and mortgage based borrowing, student loans are about the possibility of future income, not short run consumption. So I would not expect a collapse of current consumption, if the default rate increases significantly. And I doubt that there is a large bank, like Lehman, that would go under if a large number of borrowers default (of course I might be wrong on that).

At any rate, that does NOT mean that the problem is minor. Quite the opposite. By reducing the ability of people to spend earlier in life, and delaying other normal commitments like, for example buying a house, the increase in the student debt burden might be drag on long term growth prospects. That's why a bailout of students is necessary, and a permanent solution for the cost of college education is needed.

Rosnick & Baker on The Wealth of American Households

By David Rosnick and Dean Baker

From the Abstract:

This paper presents data on the wealth of households by age cohort based on new data from the 2013 Survey of Consumer Finances (SCF). It shows that the upward redistribution of wealth continued between 2010 and 2013. As a result, most households had less wealth in 2013 than they did in 2010 and much less than in 1989, the first year examined. This is in spite of the fact that households were much less likely to have traditional defined-benefit pensions than in prior decades.

Read rest here.

Highly Educated, Highly Indebted: The Lives of Millenials

From The Atlantc:

What's are today's young adults really like? For those who've spent too much time gazing into the dark recesses of Thought Catalog or obsessing over "Girls," the Department of Education has a new report that offers up some enlightening answers. In the spring of 2002, the government's researchers began tracking a group of roughly 15,000 high school sophomores—most of whom would be roughly age 27 today—with the intention of following them through early adulthood. Like myself, many of those students graduated college in 2008, just in time to grab a front-row seat for the collapse of Lehman Brothers and the economic gore fest that ensued. In 2012, the government’s researchers handed their subjects an enormous survey about their lives in the real world. Here, I've pulled together the most interesting findings.

Read rest here

Student loans are the only bubble still around

Debt deleveraging has taken place in the mortgage market as well as in the credit card market, but not in the student loans market. And that is reflected in the delinquency rates.

Student loans have now a higher delinquency rate than the other two categories. And this is only getting worse with the terrible labor market conditions.

For more see the story in Mother Jones.