Student Debt Bubble Still Growing; Nearly 10% of Loans Delinquent

Student Debt Bubble Still Growing; Nearly 10% of Loans Delinquent from Schiff Gold

The rate of delinquency on student loan debt pushed up to 9.5% in the first quarter of 2019, even as total student loan debt climbed to $1.49 trillion according to the latest debt data from the Federal Reserve Bank of New York.

Student loan debt ranks as the second-largest consumer debt category, trailing only mortgages.

The total of the outstanding student loans in the US has more than doubled since 2009 when it was $675 million.

And there is no sign that the upward-spiraling level of student loan debt will slow any time soon. Just as one example, a recent study by LendEDU revealed the average student loan debt incurred by students at 4-year Michigan universities increased by 52% over one decade. In dollar terms, the amount of debt taken on by Michigan students ballooned by over $10,000 between 2007 and 2017.

The average increase for 921 US colleges and universities comes in at $9,577.

All of this debt is having a significant impact on the financial prospects of young people. Student loan debt is one of the biggest factors driving a growing trend of millennials struggling to transition into adulthood. Generation Z – the cohort coming up behind the millennials and currently hitting their college years – won’t likely fare much better. Former JPMorgan analyst Kelly Peeler told the Detroit News, “Student loan payments are the crux of the financial identity of Gen Z.”

“There are indications that Gen Z might not be able to own homes in the future. They might not be able to have children to the capacity that millennials did because they are paying $350 per month. For the baby boomers, that was going to their mortgages.”

More than 44 million American student loan borrowers owe that nearly $1.5 trillion, according to statistics compiled by Zack Friedman for an article published by Forbes. Students who graduated from college in 2017 left school with an average debt of $28,650, according to the Institute for College Access and Success.

This creates a tremendous drag on the economy. Every dollar spent paying off loans is a dollar not available to buy houses, cars or put into savings. Parents are even beginning to feel the squeeze.

Ironically, many university officials blame lack of funding for the student loan crisis. A spokesman for a Michigan university told a local TV station that the funding cuts have shifted the burden of who pays for college increasingly to students and their families.  But this doesn’t explain the spiraling cost of a university education. In fact, the flood of student loan money into universities has actually driven education costs up.

Universities are flush with cash thanks to the infusion of student loan money. With all of those dollars available backed by the good name of Uncle Sam, schools are competing for students and all the student loan dollars that come with them. Schools have to one-up each other with amenities to attract the brightest and best  – or whoever can get a loan. As a result, kids today get a much more luxurious university experience than student a few decades ago could have ever imagined. Schools give students free iPads, furnish dorms with Tempurpedic mattresses and granite counter tops, and build multi-million dollar student centers.

This isn’t mere speculation. A paper published by the National Bureau of Economic Research found that a large percentage of the increase in college tuition can be explained by increases in the amount of available financial aid.

Keep in mind, American taxpayers ultimately hang on the hook for the vast majority of these loans. In a speech late last year, Education Secretary Betsy DeVos revealed just how significant the level of student debt has become, noting that it comes with “significant risk.”

At 1.5 trillion dollars, FSA’s loan portfolio is now one-third of the Federal government’s balance sheet. Last year, uncollateralized student loans—which are all of them, by the way—accounted for over 30 percent of all federal assets. One-third of the balance sheet. Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk. In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value. Federal Student Aid has a consumer loan portfolio larger than any private bank. Behemoths like Bank of America or J.P. Morgan pale in comparison. FSA also is the largest direct loan portfolio in the whole Federal government—by far—surpassing all other federal direct loans combined by 1.1 trillion dollars.”

DeVos admitted that the spiraling level of student debt has “very real implications for our economy and our future.”

The student loan program is not only burying students in debt, it is also burying taxpayers and it’s stealing from future generations.”

The student loan mess is yet another bubble created by government.

And like all bubbles, it will eventually pop.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.