Amid declining household debt, rising student loans remain a drag on the economy

Total household debt continues to decline, but rise in student debt hampers economic recovery.

The total amount of debt held by Americans fell again in the first three months of the year and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday….

The level of household debt in the first quarter fell by $110 billion, or 1%, to $11.23 trillion, mainly because consumers reduced mortgage balances and used their credit cards less.

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Auto and student loans rise.

The increase in the value of auto loans was the smallest in four quarters, suggesting that car companies might have cut prices to attract buyers as demand for new vehicles slackened. Still, auto loans rose $11 billion to $794 billion to mark the ninth straight quarterly gain.

Student loans have ‘surged 46% since the end of the recession’.

Student loans, which climbed $20 billion in the first quarter, have surged 46% since the end of the recession to an all-time high of $986 billion. More students are going to college or remaining in school longer to obtain graduate degrees to improve their chances of finding a job amid a slow economic recovery.

Yet the escalation in student loans is also leaving many young people saddled with large debts. Although the delinquency rate on student loans fell slightly in the first quarter to 11.19%, that’s still the second highest rate ever. Before the recession, delinquencies averaged around 7%.

The decline in household debt is good for a recovering economy, but economists believe growing student loans are ‘acting as a drag on growth’.

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

Career and money advice for new college graduates

If you’re a millennial, do these things, or else risk remaining unemployed for a long time.

1. Wake up early. Job seeking is a full-time job.
2. Don’t pass on everything. No entry-level job is ideal.
3. Stop relying on mom and dad.

Career advice from Aol Jobs, summarized by FINS Morning Coffee

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With two out of three college graduates averaging more than $24,000 in student loans, Fox Business steps in with this financial advice.

Step 1: Create a Budget

Even if grads don’t have a concrete post-grad plan just yet, creating a budget of projected expenses such as bills, rent and discretionary spending can help them better understand their cash flow situation, suggests John Bucsek, managing director with MetLife Solutions Group. …

Making a budget doesn’t have to be an overwhelming prospect—grads can easily keep up with their expenses using sites like Mint.com or creating a simple spreadsheet….

Step 2: Figure Out Student Loan Terms

Grads typically only have a six-month grace period before having to start repaying student loans, making it essential to secure a job and stay on top of other expenses.

Unemployed or financially-strapped grads should consult with their lender to determine repayment options available to them such as deferment, forbearance, and Income Based Repayment plans should they have issues making payments on time….

Step 3: Get High Interest Debt in Check

Whether grads are an authorized or co-signed user on a parent’s card or have their own account, they should  focus on getting the debt with the highest interest rate paid down first.

Understanding how debt impacts future goals and how credit score plays into every major purchase can help them stay on top of making steady payments and monitoring credit history health, says Bucsek.

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A variation on the expert’s advice

Since the percentage of young adults living with their parents has risen to 22% today, from 11% in 1980, it appears the recommendation to “stop relying on mom and dad” is being ignored by many.  Here’s my variation on the preceding advice.

1. Get up early every day to find a job, or to hone your skills to make yourself more employable.
2. Even if you can’t find a job in your field, work somewhere, even if it’s part-time.  Earn some money.
3. If you’re living at home, use the opportunity to save aggressively and/or pay down student loans.

 Related:  Parents have lower expectations for kids becoming financially independent (Cost of College)

Do we have a student loan crisis?

While it’s unlikely that student loans on their own have created a crisis, they do seem to be a drag on our struggling economy.

When the The Atlantic looked at the student loan “crisis”, some of the numbers are alarming.

… The cost of college has spiked 150 percent since 1995, compared with a 50 percent increase in the cost of other goods and services. Last year, outstanding student loans soared to nearly $1 trillion—a 300 percent jump since 2003. College is an undeniably risky investment, seemingly more so than ever. But are rising debt levels a national crisis?

But their infographic presented a more balanced look at some of the numbers, with the first three sections making the argument that the averages do not support the idea of a crisis.

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Not a crisis, but problematic for a struggling economy

Updated 2012 numbers from the Federal Reserve Bank of New York report

The paper starts by noting that student debt has grown dramatically over the last decade — some 43 percent of Americans under the age of 25 had student debt in 2012, with the average debt burden now $20,326. By contrast, back in 2003, just 25 percent of younger Americans had debt, and the average burden was $10,649.

Younger Americans with student debt are less likely to buy homes and automobiles, holding back spending that has typically fueled past economic growth.

… it looks like rising student debt really might be eating into the housing and auto markets. If so, that could have big implications for the U.S. economy. Auto and housing sales have been a huge driver of growth these past few years, though auto sales are still well below their peak. (Analysts are expecting around 15 to 15.5 million sales in 2013, versus an average of 16.6 million per year during the 2000s.) If younger Americans are retreating from those markets, that could help slow down the recovery.

Related:  College debt levels higher than all other types of consumer loans (Cost of College)

How did the last-minute fiscal cliff legislation affect college financial aid?

How did the American Taxpayer Relief Act of 2012, AKA as the last-minute fiscal cliff legislation, affect college financial aid?  Mark Kantrowitz gives an update.

• The American Opportunity Tax Credit, which helps defray undergraduate college education expenses by allowing borrowers to deduct up to $2,500 in student loan interest, has been extended for five years, through the end of 2017.
• The Tuition and Fees Deduction, which allows taxpayers to claim up to $4,000 in tuition expenses, has also been extended. The deduction, which was set to expire at the end of 2011, will continue through the end of 2013.
• Some changes to the Coverdell Education Savings Accounts have been made permanent. This means that the contribution limit has been increased to $2,000 from $500 and that the account may be used for elementary and secondary school expenses. Higher income phaseouts have also been made permanent.
• The deal permanently repeals a five-year limit for deducting up to $2,500 via the Student Loan Interest Deduction. This means that students and families can claim on their tax forms student loan interest beyond 60 months.

What happens if no further action is taken to prevent across-the-board cuts of 8.2% in student aid that would be part of a delayed sequestration?

Unless Congress acts before March 1, Mr. Kantrowitz said, fewer students will be able to get work-study jobs and Federal Supplemental Educational Opportunity Grants, as these programs would experience cuts. Fees for federal education loans would go up, he added, and the maximum Pell Grant would be cut by as much as $400.

Related:

• Fiscal cliff would hurt education tax benefits (and employment prospects) (Cost of College)
• Tax season reminders about education tax benefits (Cost of College)n

College debt levels higher than all other types of consumer loans

The Wall Street Journal picked its top ten economic charts of 2012, including one published in November showing that outstanding student loan debt now “outpaces all other nonhousing consumer debt”.  (Bear in mind the chart does not include unreported student loan “shadow debt” that could increase these figures by one-third or more.)

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U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion in the third quarter, the Federal Reserve Bank of New York said Tuesday. Overall household borrowing fell during that period.

Payments on 11% of student-loan balances were 90 or more days behind at the end of September, up from 8.9% at the end of June, a rate that now exceeds that for credit cards. Delinquency rates for all other consumer-debt categories fell or were flat.

By design federal student loans are easy for almost anyone to get.

Nearly all student loans—93% of them last year—are made directly by the government, which asks little or nothing about borrowers’ ability to repay, or about what sort of education they intend to pursue.

President Barack Obama championed easy-to-get loans during the campaign, calling higher education “an economic imperative in the 21st century.” A spokesman for Education Secretary Arne Duncan said the goal is “to make student loans available to as many people as possible,” and requiring minimum credit scores would block many Americans from going to college….

… the government demands no collateral and has no underwriting requirements….

… “The way the system works now…put money on the stump, people come and get it,” said Anthony Carnevale, director of Georgetown University’s Center on Education and the Workforce. “Can’t blame them. It’s sitting out there in plain view. It’s easy to get.”

Jackson Toby, a retired Rutgers professor and adjunct scholar at the American Enterprise Institute, recommends reforms that would make student loan lending standards similar to those of other consumer debt.  This change would exclude many lower-income students.

He proposes that students undergo a comprehensive assessment of credit-worthiness, including how much debt they currently have, their academic history and their expected income upon graduation, given their major, before getting federal student loans.

Imposing tougher standards would exclude some potential borrowers. “You would have loans only going to upper-income students at the best colleges,” said Mark Kantrowitz, who publishes Finaid.org, a student-aid website.

Other charts among the WSJ’s top picks cover the changes in categories of consumer spending over the last century, how unemployment benefits differ among the different states, and how deficit spending has become the norm in recent years.

Related:  Did the student loan bubble just burst? (costofcollege.wordpress.com)

Income Based Repayment (IBR) is a ‘moral hazard’ for high-income student loan borrowers

The new and improved Income Based Repayment (IBR) plan that went into effect last month is expected to benefit higher-income borrowers the most while offering only marginal assistance to low-income borrowers.

…  the New America Foundation, a nonprofit and nonpartisan policy institute, says the changes ultimately will provide only marginal help for low-income borrowers who are at the greatest risk of default.

Rather, the changes would provide big benefits to middle- and high-income borrowers, particularly for those seeking a graduate degree, the authors found. The report says that at least one financial planning company is telling law school students that the changes could allow them to write off $100,000 in student debt.

Changes to produce more generous IBR provisions were expedited by the Obama administration to take effect two years earlier than originally planned.

At least one financial planning firm, the Advantage Group, is capitalizing on the IBR features by advising clients on how they can avoid paying back portions of their student loans.

“Stop wasting your money on student loan payments,” says the Advantage Group Web site. The firm notes that an average graduate from California Western School of Law owes more than $145,000 in student loans, amounting to monthly payments of more than $1,690.

But the changes introduced by the Obama administration could allow a graduate making $70,000 a year to reduce monthly payments to $448 a month and “have over $100,000 of debt forgiven,” the Advantage Group says.

Terry DeMuth, chairman of the Advantage Group, said the firm was simply trying to help its clients benefit from the program.

A “huge giveaway” for high-income borrowers

The New America Foundation report recommends that the administration make changes that would focus the benefits of income-based repayment on lower-income borrowers and limit those for borrowers earning big incomes.

“If you are low-income, it doesn’t really give you a big bang,” said Jason Delisle, one of the authors of the study, which estimates that monthly payments for low-income borrowers would drop to $20, from $25, under the changes. “If you are high-income and have a lot of debt, this is a huge giveaway.”

Mark Kantrowitz, founder of finaid.org, a Web site about college finances, disputed the way the New America Foundation calculated some of its numbers. Nonetheless, he said he agreed with the premise.

“The design of the plan has the potential to misdirect some of the subsidies towards people who will be earning fairly substantial incomes,” he said. “The improvements don’t benefit the low-income students as much as the high-income students.”

A “moral hazard”?

JASON DELISLE, DIR., FED. EDUCATION BUDGET PROJECT, NEW AMERICA  FOUNDATION:  You’ve got a moral hazard.  You’ve got an incentive to borrow away knowing that you’re not going to have to pay it back.

SYLVIA HALL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here’s how it can be a problem—graduate students can borrow an unlimited amount of money to pay for school.  They start their careers with small or moderate salaries, making monthly payments of 10 percent of their income.  But remember, grad students often become very high earners, like doctors and lawyers.  As their salaries increase, the monthly payments on the student loans are capped based on the borrower’s debt at graduation.  That means when the debt is forgiven, there could be a whole lot left.

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How Much Student Loan Forgiveness Would Senator Rubio Qualify for Under New IBR Repayment Plan?

Senator Marco Rubio (R-FL) just announced that he paid off his student loans early with the proceeds from a book deal. Paying down debt ahead of schedule is generally a prudent financial move. But if the Obama administration’s new Income-Based Repayment (IBR) plan had been in place when Senator Rubio graduated from law school, his decision to pay down debt early would have been a sucker bet….

We estimate that if the New IBR plan were available back in 1996 when Senator Rubio started repaying his student loans, he would have $83,482 forgiven in the year 2015….

Don’t forget that forgiven student debt is taxable income, at least for now.

Related articles

• Did the student loan bubble just burst? (costofcollege.wordpress.com)
• Proposed bill would improve student loan debt collection (costofcollege.wordpress.com)

Proposed bill would improve student loan debt collection

Under a proposed bill sponsored by Wisconsin Representative Tom Petri, the federal government would begin to garnish wages of individuals whose student loans are in default.  This move would save about $1 billion in commissions now paid annually to private debt collectors.

… Payments would be capped at 15 percent of borrowers’ income after basic living expenses.

The proposed program is intended to force qualifying debtors to participate in the existing Income-Based Repayment Plan (IBR).

In the U.S., borrowers currently must ask to be enrolled in income-based repayment programs and many don’t because they don’t know about them or collections companies don’t tell them….

Last year, 5 million borrowers were in default — generally meaning they had failed to make payments for at least 270 days — on $67 billion in loans, more than twice the amount in 2003. Through the new system, based on experience in the U.K., 98 percent of borrowers could meet their loan payments through automatic payroll withholding, according to Petri’s office.

The Education Department already has the power, without a court order, to seize a part of wages, tax refunds and Social Security payments to collect on student loans. There is no statute of limitation.

New law would result in lower student loan interest rates under our current economic scenario.

The legislation would tie the interest charged to Treasury market rates. Currently, students in the most popular program pay as much as 6.8 percent.

Problem of ballooning debt balances would be curbed.

In another boon to borrowers, the plan would cap interest owed at 50 percent of a loan’s face value at the time of graduation, giving a break to lower-income borrowers who take longer than the standard 10 years to repay loans. For a student who took out $27,000 in loans, about the national average for a graduate of a four-year program who borrowed, the interest couldn’t exceed $13,500.

Student loans, which can rarely be canceled through bankruptcy, can balloon to several times their original size, after adding interest and collection fees.

Current loan subsidies and loan forgiveness features would be eliminated.

Low-income borrowers would no longer be excused from accruing interest when they are in college. The bill would also eliminate income-based programs that forgive loans entirely after 20 or 25 years — and, after 10 years, for those who enter public-service careers, such as teaching or law enforcement. The new system would apply only to new loans.

While taxpayers might save money by not picking up the tab for forgiven loan balances under the provisions of this bill, cutting loan subsidies may cost more money since it’s unclear if “subsidized loans are a moneymaker for the federal government“.

Political concerns

While Petri’s bill makes sense, the elimination of the low-income subsidies and forgiveness could face opposition from Democrats, said Sandy Baum, a senior fellow at the George Washington University School of Education. Republicans may be concerned that taxpayers won’t be repaid if more borrowers join the income-based program, she said.

Congress is expected to consider the bill early next year.

Related articles

• Did the student loan bubble just burst? (costofcollege.wordpress.com)
• New Bill Would Take Income-Based Student Loan Payments Straight From Your Paycheck (consumerist.com)

Wages for college graduates fall while tuition and student debt rise

Two charts that show wages for college graduates are falling while tuition and student debt are rising:

This “shocking chart” has been making the rounds recently.

Earlier this year, I posted a copy of this.

On top of all this, we have an economy today where “40% of all federal spending is borrowed, so that our children will have to pay for it“.

Related:  The twin problems of rising debt and falling wages for college graduates (Cost of College)

Did the student loan bubble just burst?

This “Scariest Chart Of The Quarter” posted on Zero Hedge is making the rounds on the internet.  The chart is from the New York Federal Reserve’s quarterly report.

This increase from 9% to 11% in new delinquent student loans may actually be under-reported, according to a footnote in the Fed report.

As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.

…

An ominous pronouncement from the Zero Hedge writer:

And so it’s official: Pop goes the student loan bubble, as just confirmed by the Fed.

A lively discussion in the comments section includes some arguments against this claim, but most seem to think the end is near.  If this sharp uptick is actually the beginning of the end, an increasing percentage of debtors may qualify for the Income-Based Repayment Plan (IBR) and eventual loan forgiveness.  That would mean taxpayers will be paying off these loans.

Related:

• Easing the rules on paying back student loans (Cost of College)
• Obama administration offers student loan relief (Cost of College)

‘Shadow debt’ – unreported student loan borrowing

“Shadow debt” consisting of loans not captured in traditional reporting should be taken into account when the impact of rising college costs on families is considered.  A comment on CollegeConfidential explained it this way.

There’s several different ways to borrow for college which won’t show up with the current data mining techniques.
- Borrow from home’s equity
- Borrow against 401K
- Charge on credit cards
- Borrow from relatives

Given parent plus loans are fairly expensive (relative to this low rate environment) parents might be finding cheaper ways to borrow.

Interest rates on unsubsidized Stafford loans are 6.8% and Parent Plus loans are 7.9%.  By comparison, home equity rates averaged 4.58% this week.  Anecdotally, I can think of at least three families that have tapped into their home equity to help pay college tuition.  I borrowed from a relative when I was in college.

How much student debt goes unreported?

The question arises, then, of how much shadow student debt goes unreported.  Andrew Gillen did a back of the envelope calculation, based on Sallie Mae’s reporting of how families pay for college.  He concluded that the official student loan figures should be bumped up by about 31%.  I did a similar calculation and came up with a factor of 28%.

Official student debt figure has been reported to be more than $1 trillion.  Although it’s unclear whether it should be bumped up by 10%, 30%, or 100%, I’m convinced that a substantial amount of college debt is going unreported.

Related:

• Paying student loans in your 20s, 30s, and beyond interferes with saving for retirement (Cost of College)
• Federal student loan interest rate will stay at 3.4% for at least one more year (Cost of College)