Student Loan Debt – The Millennial’s Participation Trophy.

Student loans are on pace to reach$1.5 Trillion dollars, Bloomberg reported recently, after increasing $37 billion in Q3 2018. This asburdly large figure is concerning on a number of fronts, not least of which the size and the liability it poses for young professionals. Students are provided loans from governmental and private lenders based on the notion that future wage premiums derived from education will be the collateral. Well, is that collateral securing those loans as intended? Are the banks coming to Tonya Harding us?

Bloomberg reported that the delinquency rates for loans was 11.5%. Loans are considered delinquent if they are either 90 days late or in default. It appears as though the collateral to secure these loans was massively overvalued, in that the improved wages from education have not sustained the cost of maintaining them. 

An 11.5% default rate seems absurdly high for that volume of debt, but surely it was much higher for the mortgage crisis which caused the last recession right? Well let’s take a look below:

Delinquency rates for mortgages topped out at 11.4% during the recession.

Oh no. Well, it looks as though the delinquency rates for mortgages was 11.4% at the recession’s peak in 2010. What is interesting here is that people were aware and felt the effects of the recession far before this peak, as early as 2007. If the student loan “bubble” were truly endangering the economy, wouldn’t we all be feeling its effects? Well baby boomers, I’ve got some news for you: we have been feeling this recession since 6 months after we graduated! In fact, we can see this directly in rates of home ownership for people under 35.

The rate of home ownership among Millennials is a full 8 points lower than Generation Xers when they were the same age. I’ve created a graph below to help illustrate part of the reason why:

I’m no graph savant, but I put this together to show why it takes longer for Millennials to become home owners. This should be partly intuitive since if you have loan debt it will take you longer to accumulate a down payment for a house. The blue line shows household wealth for someone with no student loans, if they are able to tuck away $5,000 a year. The black line shows the household wealth for someone with student loans. The orange line is the $20,000 threshold for a down-payment on a traditional loan. The red dots represent where the HH wealth intersects with the $20k line, that is, when they can afford a down-payment. In this scenario, it takes the student loan bearer an extra 5 years to afford a down-payment. But, as the red student loan line indicates, they don’t pay off the loan for a number of years even after that. The red shaded area represents the difference in HH wealth between loans and no loans prior to affording a down payment.

For some, their salary premium may allow them to save more and pay more on their debt, accelerating the convergence of the two HH wealth lines. For most others, however, Loans are a delaying factor, replacing a mortgage with debt, or inverse wealth accumulation. The loans slow the accumulation of equity into homes, which for the middle class is the biggest source of household wealth. If the educated workforce must wait until they are in their late 20s, or late 30s to be able to afford a home and begin that accumulation process, that poses long term concern for the security of the middle class.

Evidently, for baby boomers, this titanic iceberg of young debt has only crossed their radar now because it threatens to shear a gash into the hull of the greater economy. It doesn’t even appear to be slowing down, as student loan issuance has seen a 157% increase since 2007. Here again ya boy Bloomberg has a nice graph:

So, despite the fact that delinquency rates are rising, and wages have not seen any meaningful upward pressure during this time frame, lenders still continue to have a free-for-all with student loans. This means that the debt to income ratio for the cohort of recently graduated students must be increasing. This further compounds the wealth accumulation problem, depresses housing demand, and places the middle class in peril. Hmm, where have we seen this before. What ancient, mythical tales of debt and crisis could we possibly draw on to warn us of any impending doom? 

Baby boomers may rightly ask, “if this debt bubble is as dangerous as the 2007 mortgage crisis, why isn’t everyone losing their jobs, why isn’t the market tanking, and where is my crossword puzzle? Well, you fatuous nincompoop, student loans have the odious privilege of being a huge issue which only affects a certain segment of the population – for now. Due to its snowballing size, however, it is garnering press attention as it threatens to affect everyone else. If the trend continues as shown by the above chart, what level will it reach before leveling off? Further, won’t it also be the case that a greater percentage of people go to college in the coming decades, accelerating this problem as the student loan debt consumes a larger portion of graduate incomes? 

If colleges continue to admit more and more students, won’t they be able to save on cost by collecting more tuition per classroom? After all, a classroom is a fixed cost, and you can save on lights, heating, teaching, and materials by including more loan vessels students to defray those costs. According to this story on Washington Post, college has become more expensive despite greater enrollment due to the paradoxical system of collegiate competition. their argument is, that because so many more students are enrolling, colleges are compelled to spend more on residual benefits to attract more students. These benefits include things that weren’t available when the boomers were going to college like career services, mental health services, and a $288 million dollar stadium that was built in the middle of a god damn recession! 

So, if colleges can’t save money by scaling services to more students, and costs are rising much more rapidly than inflation, how will the education system be able to supply loans to students based on the marginalized collateral of future wage gains? The answer is that, well, the system can’t keep doing this. Not only is it bad business to borrow from some nebulous future dollar earning which are prone to default, but it is also unethical to collateralize the human mind. Student loans are some of the only loans that bankruptcy can’t erase, making death the only way to release a student from their loans. Yikes that’s morbid. Well of course that’s because the knowledge can’t be taken away, so why should the student be released, ask the profoundly greedy Montgomery Burns of the world?

If you value education, you should be asking whether we should be collateralizing intangibles such as knowledge and training for the purpose of some wage premium which may or may not be earned in the future. You should question whether this system is the best we can do, or whether an alternative is better. 

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