stud debt

 

Student loans are the next great subprime crisis! At least that’s what the usual purveyors of doom and gloom say (see this, this and this). The numbers are big, the default rates are high and soon enough this is going to tip the economy into the next crisis or recession.

Not so fast, writes Torsten Slok, chief international economist for Deutsche Bank AG, in his forthcoming September chart-book

continues here

 

 

 

 

Category: Credit, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Student Loans Are Going to Crush the Economy! (No, they are not)”

  1. rd says:

    The big difference is that you can’t get rid of your student loans without paying them off. You may default but they can keep going after you even if you have gone bankrupt. However, they are most likely causing significant economic drag, similar to having one of your brakes constantly in contact with the wheel. They are most likely one of the main reasons why millenials are not participating fully in the economy buying houses etc. But that is very different from causing a massive run-up of an asset like we saw with the housing crisis and instead of crashing the economy is just pulling a little bit off the top every year.

  2. BennyProfane says:

    I think it’s just a matter of silly semantics, when you hear the term “bubble” and “pop” used.

    But: “Typically, the business professionals, lawyers and doctors who carry this debt can service it, courtesy of the higher incomes and lower unemployment rates they have compared with their peers.”
    Last I heard, only one half of law school grads are getting hired in the field in any way. That’s quite a debt load for no job at all. And talk to a lot of doctors, and some bemoan the day they decided to do that long slog through med schooling, because the income just isn’t what it used to be. Don’t know about the value of an MBA today, but I suspect it isn’t an automatic ticket to a high end surburban home and two BMWs.

    “To provide some context, the Federal Reserve Consumer Credit – G.19 shows student loans outstanding were $1.27 trillion in the second quarter of 2014. The credit card debt outstanding was $873 billion.”
    Kinda sad to be comparing one awful credit binge to another, isn’t it? Combine both, along with massive mortgage debt for an overpriced housing market, and there’s enough to maybe not “crush” the economy, but certainly put a big anchor on it. If I was 28 today, I’d make sure I had quite the trust fund before striking out into small business land.

    Oh, and just today, I read another sad tale about someone having their SS check garnished to cover a student loan they co signed for. Fed student loans are forever. Do they go after your estate when you finally kick?

    • Frwip says:

      Do they go after your estate when you finally kick?

      Yep. They even go after your parents :

      http://money.cnn.com/2014/07/28/pf/parents-student-loans/index.html

      ~~~

      ADMIN: I bet you there was a co-signatory on that

      • Frwip says:

        Yes, they were co-signers of that “loan”.

      • Petey Wheatstraw says:

        Well, now that you’ve pointed it out, the government will “fix” it (retroactively, of course).

        No crimes were committed . . .

      • BennyProfane says:

        Well, the person I read about yesterday was somewhere around 84. Living just on SS. I mean, c’mon, already. This is out of hand.

        Also a co signer.

    • Petey Wheatstraw says:

      One attorney I know says that he has had to drop his rates so far that he’s having to borrow to pay for his mandatory CLE requirements. Then again, he has all of the usual middle class debt that is mistaken for wealth. Keeping that in mind, it’s really difficult to feel sorry for lawyers.

    • DeDude says:

      Even worse for the medical students they may end up graduating but never get the additional clinical training needed to become certified and able to practice medicine. The clinical training has been left in the hands of the for-profit medical-industrial complex and they are finding that there just isn’t enough profit in clinical training, so we don’t have training slots for all the graduates. There is a limit to how much hospitals can save by reducing the quality of that training to a joke, eventually they have to just let it go.

  3. CD4P says:

    And here I concluded student loan debt was going to drive more coeds into Scifi “Sharknado” films…

  4. 4whatitsworth says:

    Lets see… if you graduate with 25K in debt and you get a job for say 40K a year job in California your take home pay is about 28,000 year – 3K/year to repay your loans over 10 years. What is the big deal? I just don’t understand why these kids are not motivated to work. They are going to get raises of course and think of all the good that comes from the 35% tax they will pay(State and Fed).

    Let them eat cake! Hey how much is cake these days?

  5. Petey Wheatstraw says:

    I wonder how much debt a tradesman accumulates on his way to a net-positive income bracket.

    I worked, between semesters and during the summer, as a plumber’s helper, back in my college days. The income stream was immediate and healthy. As one of the Masters I worked with pointed out: there’s no upper end to the money people will pay to fix a clogged drain or broken water pipe (I assume the same holds true when the lights go out).

    I’ve often thought of returning to that or another trade, as the work you do gets left at the job site at quitting time.

    You might not get rich, but you’ll earn (and I do mean ‘earn’), a good living, and you most likely won’t die from the stress related diseases that eventually come from sitting at a desk for 60+ hours a week.

  6. Petey Wheatstraw says:

    Okay class, to begin with, let’s assume you get a job . . .

    All of this assumes a job, to begin with. Here’s a fairly comprehensive view of what these highly educated potential workers have to look forward to:

    http://www.epi.org/publication/class-of-2014/

    God help the numbskulls who attend the likes of Liberty and Regent “Universities” (attendance at which is largely made possible by GSLs).

    Higher education has, like damned near everything else, become a very slick, self-reinforcing, government-backed scheme for wealth extraction.

    The future belongs to those who hustle: entrepreneurs and (sometimes legitimized) criminals.

  7. Frwip says:

    No. Student loans are not the next great subprime crisis.

    Regardless of their dubious economic and social merits, there are internal reasons why student loans are not susceptible to the same bubble and pop dynamics as RE loans.

    - Student loans are not granted based on the valuation of a specific asset class, only on finding enough warm bodies willing to carry them. Therefore they are not susceptible to a Minsky dynamic, of debt and assets prices propping up each other into a bubble until revulsion crashes the party, the assets, the debtors and, ultimately, the creditors.

    - Student loans can’t be discharged in bankruptcy (which is socially bad, but that’s another story). At most, non-performing loans can only be whittled down by the debtor in a long process extending over years. It intrinsically spreads out loss recognition by the creditors. A loss is a loss is a loss, but at least, it bears the silver lining of avoiding sudden liquidation panics.

    - Internally, the performance of each loan is largely decorrelated from that of other loans, which makes student loans much more akin to insurance than mortgage underwriting. Well, it still isn’t insurance against doing it wrong. Put enough poorly underwritten loans in a bond and, no matter how decorrelated the stinkers are, the bond will still stink to high heavens. And general economic and labor market conditions certainly do introduce some degree of correlation.

    But even massive unemployment only affects a fairly small segment of the workforce and does not radically alter the ability to pay of the rest of the workforce. So a large degree of decorrelation can be assumed, which at least help a lot in assessing risk, one of those rare cases where quants can actually wave their Gaussians about and not look completely ridiculous.

    So, no. By their very nature, student loans are not the next great subprime crisis. If that class of assets goes into crisis, it will be a long, slow, protracted process, leaky-bladder style. For student loans to induce a major financial shock, it would have to happen on the refiing side of the secondary market. And there, it’s way out of my league, so I’ll let better people expound the kibosh forth.

  8. Petey Wheatstraw says:

    “Student loans are not granted based on the valuation of a specific asset class . . .”

    No loan to value correlation? Is that a bug, or a feature?

    “It intrinsically spreads out loss recognition by the creditors.”

    These loans are guaranteed by the US government, and backed by the USD, which is backed by . . .

    . . .never mind. How could there possibly be losses?

    “- Internally, the performance of each loan is largely decorrelated from that of other loans . . .”

    As you point out: Except when they’re not.

    “But even massive unemployment only affects a fairly small segment of the workforce . . .”

    So, the unemployment rate (expressed as percentage), is irrelevant. The actual and “adjusted” unemployment rates do not indicate a “small segment.” BTW: a percentage is a percentage. “Large” and “small” are semantic. Also, we aren’t even talking about “the wokforce.” We’re talking about the ability to repay loans, based on the expectation of employment at a certain income level, for college graduates.

    This time (or this situation, if you will), is different.

    • Frwip says:

      I’m not saying this time is different. I’m saying student loans are different from mortgages. And yes, they are different.

      And btw, allow me to quote myself :

      Regardless of their dubious economic and social merits, …

      I don’t like student loans. They are going to ruin the lives of an awful lot of people, all of that to enrich a bunch of scammers and financiers I would love to see thoroughly [censored] in the [censored] ’till death ensues.

      But if I’m looking at them strictly from a macroprudential point of view, yes, they are a lot less dangerous to the financial sector or even the taxpayer than the subprimes. It’s to the debtors that student loans are toxic.

      The real risk for private label loans is legal, if Congress ever does the right thing and make those ‘loans’ normally dischargeable (fat chance…).

      And for federal loans, Jim Rickards telling us they are going to put the US gov on the way to Greece, please… Even if 50% of outstanding federal loans were to default and end in total loss for the US Treasury, that would still not approach the cost of the Iraq war or even the annual bill for the care and grooming of our beloved military. I have no doubt our Lords and Rulers will try to use such a crisis as a pretext to cut corporate tax rates, Social Security and the Department of Education, but the bankruptcy of the US Treasury it won’t be.

      So, no, student loans are not the next subprime.

      • rd says:

        Student loans are not mortgages because Congress doesn’t allow the lender to foreclose on the student. We haven’t quite returned to the period of slavery and indentured servitude, although it would not surprise if the House puts forward a bill to that effect in the near future.

  9. DeDude says:

    These averages are per loan not per student. Most students have a lot of different loans, both public and private. It is unlikely that these loans will become a crisis, but they are certainly going to be a drag on economic activity as graduate are saddled with substantial monthly payments for 10 years or more.

  10. TMoney says:

    Student loans are not the next subprime, they are MUCH worse. Non-dischargeable debt backed by the government ? Great for lenders – not for borrowers.

    Every penny spent on digging out from student loans removes marginal demand from the economy at large. Growth in student loans and a recession ensures deferments with exponential growth in loan balances (capitalized interest – just like an option ARM). You borrowed 25K put off repayment for some years, now you 50K. Increased student borrowing with no growth in starting salaries is always going to reduce demand for goods and services. The more we collectively borrow, the less we can consume in the future.

    Are you getting a raise or a bigger salary new grads ?

    It’s sharecropping of the middle class. Welcome to the new plantation. Of course you can make a run for it, say a country where student loan debt is dischargeable in bankruptcy (New Zealand works I think) and try again – until the slavers (sorry collections agents) get the laws changed.

    Your better off using credit cards for paying for college, or mortgaging your parents house – the debt is dischargeable if it all goes wrong, you can get a clean slate. Chapter 7 works.

    • Liquidity Trader says:

      ITS A SIMPLE ECONOMIC FORMULA: COST OF EDUCATION VS GAINS IN INCOME

      Thats not even discussing the advantages of being an educated human being.
      You are correct as to the mortgage, but the rest of this is rubbish

      • TMoney says:

        I don’t disagree, but college isn’t sold today on the basis of being educated (such an old fashioned notion). It’s sold on “getting a good job”. You can’t repay borrowed dollars without a job – your college education doesn’t come with a job. If you roll snake eyes and can’t find a job it’s a crippling result – even though you “did the right things”. The lenders get repaid by the US Govt and then come after you via their collections agency for twice the amount until they get their pound of flesh.
        Ever do anything irresponsible at 20 ? If you borrow too much money for college it haunts your life, because you can’t shake it – and it’s widely seen as “responsible” to borrow for college.
        The lenders don’t have to be responsible lending to you, they get paid no matter what happens.