Who would have thought the day would come when a young man or woman would have more educational debt than mortgage debt in their home. For most Americans, the mortgage is still the main debt load, but in Pittsburgh, for instance, 12.6 percent of borrowers owe more for their educations than they do for their homes, according to Magnify Money.
The next generation of graduates will include more borrowers who may never be able to repay their student debt. For borrowers in cities where home prices are on the lower side, increasing student loan balances mean the two numbers are moving closer together. The good news being built into the economy by way of low unemployment and high stock prices is not easing the minds of those that have, or are about to have, six-figure loan debt starring them in the face.
Let’s take a look at the numbers. There’s an enormous $1.5 trillion in student loan liability (through Q2 of 2018), marking the second largest consumer debt segment in the country after mortgages, according to the Federal Reserve. This figure keeps growing.
Delinquencies are on the rise. More loans are being given out in larger amounts by American colleges. Federal student loan debt currently has the highest 90 plus day delinquency rate of all household debt. More than 1 in 10 borrowers is at least 90 days delinquent. The advent of for-profit colleges has exasperated the situation.
According to Judith Scott-Clayton, a Columbia University associate professor of economics and education, “For-profit colleges pitched themselves as an end-run around low-paying jobs, but many of those degrees ultimately proved useless, leaving graduates with debt they couldn’t pay back. This is not the college experience that your parents had. John Hupalo, founder and chief executive of Invite Education, an education financial planner hit the nail on the head. “There’s a systemic problem in the student loan market that doesn’t exist in the other asset classes. Students need to get a job that allows them to pay off their debt.” Obtaining debt before income is a violation of a major financial tenet. Risk exposure is high and the student, not the college, is on the hook. I don’t think Warren Buffett would sign on to this non-Graham and Dodd model.
Interest rates for student debt are also on the rise. Undergraduate rates have jumped to 5 percent this year, while those of professional and graduate students are now at 6.6 percent.
I don’t recall Paul Volcker or Alan Greenspan remarking of the dangers of a student debt crisis, but the issue has caught the attention of Fed chairman Powell. The impact is obvious on the deleterious effects such debt can cause the student, but Powell mentions the threat to the overall economy. “As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth.” The financial ramifications for students go from a lower percentage of home ownership to the longer formation of a household in general.
So what road will this student debt crisis ultimately lead us down? Is it enough to break the bank or push the economy over the edge into recession or worse? According to Ira Jersey, the chief U.S. interest rate strategist for Bloomberg Intelligence, this won’t metastasize into an event like the sub-mortgage meltdown a decade ago. “Even though it’s a crisis in that it increases the deficit, and taxpayers have to pay more over time, it doesn’t present a systemic financial sector risk like mortgages in 2007.”
In any event, the stress is being felt. Six in 10 students report frequent anxiety about their debt, according to a report from Chegg, an education technology company. Hang in there kids. Remember there is no debtor’s prison.