Why the Ballooning Student Debt Should Be on Your Radar
We’re two weeks away from surviving the Mayan Doomsday and three weeks away from stepping over the fiscal cliff. But the unabated student loan debt is just getting warmed up. Instead of dealing with the problem, Washington’s policies continue to stoke the fire. And that economic strain spells continued misery for America’s ongoing credit crisis woes.
Outstanding student loan debt has surged 165% in just seven years, from $360 billion to $956 billion. Furthermore, the average loan balance for U.S. college students has increased more than 68% since 2005 to $27,000. (Source: “Student Loan Debt History,” Federal Reserve Bank of New York web site, last accessed December 11, 2012.)
On a more granular level, student loan debt jumped $42.0 billion, or 4.6%, over the previous quarter to $956 billion. During the same period, car loan balances increased for the sixth consecutive quarter to $768 billion. U.S. credit card debt held firm at approximately $601 billion.
Eleven percent of all student loan balances are 90 or more days delinquent, surpassing all other forms of debt. Credit cards, car loans, and mortgages are all in better shape than student loans, with 90-day delinquency rates of 10.0%, 4.3%, and 5.9%, respectively.
According to the Federal Reserve, student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008, and it is the largest form of consumer debt outside of mortgages. What’s more is that unlike credit card debt, student debt is not forgivable in bankruptcy.
And that is creating a nightmare scenario for graduates young and old. In fact, every age group is experiencing higher rates of student loan delinquencies. Student loan debt for those 60 and older has increased the most, up 337% since the beginning of 2005. For those 30–49 years old, college debt is up 156% since the beginning of 2005 at an eye-watering $461 billion.
Those in their 50s and 60s should be looking forward to shoring up their investments and preparing for retirement…not stressing about student loans, having their Social Security garnished, and moving back in with their kids. Not that their kids have it that much better.
Because student loans cannot be written off through bankruptcy, those in their 20s, 30s, and 40s who are buried by debt cannot afford to buy cars, mortgage a house, invest in the markets, or begin to save for retirement. And chances are, those who are forced to move back in with their parents to make ends meet will postpone getting married and having children. Students who default or struggle to pay their loans also can’t afford to buy their own cars or do much of anything else for the U.S. economy.
Let’s not forget those statistically invisible parents who decided to take out loans or re-mortgage their houses to pay for their kid’s education. The Great Recession saw many financially stable people lose their jobs and have to tap into their savings and retirement funds to get by, while others have had to declare bankruptcy.
Not surprisingly, with the U.S. economy growing at a snail’s pace, those with student loan debt are finding it difficult to land “good jobs.” University degrees that used to hold the promise of higher-paying jobs don’t anymore.
Fourteen percent of America’s waiters and waitresses have bachelor’s degrees. More than 16% of bartenders and five percent of janitors have bachelor’s degrees. In fact, half of adults with bachelor’s degrees have jobs that require less education. (Source: “Janitors, clerks and waiters with college degrees,” CBS MoneyWatch, November 5, 2012, last accessed December 11, 2012.)
If I had to pay $100,000 for a degree and was told there was a 50/50 chance I wouldn’t land a good job, would be laden with debt, and living with my parents…I wouldn’t take the risk. Whether it applies to a student loan or walking down the aisle, everyone thinks they’ll buck the odds. And why not? Few set out thinking they’ll fall short.
Just as homeowners walked away from mortgages that outstripped the shrinking value of their properties (and helped fuel the 2008 credit crisis), a similar recipe of easy money and the scarcity of high-paying jobs means a large number of post-secondary school graduates are going to default on their student loans.
At the current rate, American student loan debt will surpass combined credit card and car loan balances within five years. With incomes stagnating, the student debt loan bubble will either stretch itself thin or pop. (Source: “U.S. student debt on scary trajectory,” Reuters, July 18, 2012, last accessed December 11, 2012.)
The U.S. Department of Education holds a $352-billion portfolio of student loan receivables—something unemployed and underemployed students won’t be able to repay. (Source: “Federal Lending Programs,” Center on Federal Financial Institutions web site, last accessed December 11, 2012.)
But the government may have to. Even though they don’t have the money to pay for it, they can always ask the Federal Reserve to print more. After all, you have to print money to make money.
Thanks to three rounds of quantitative easing (QE), the Federal Reserve has already printed off around $3.0 trillion. The national debt already stands at over $16.0 trillion. What’s another trillion?
Besides, what’s the worst thing that can happen? Your dollar gets devalued and international confidence in the U.S. economy and greenback evaporates? Discretionary income disappears along with a U.S. economy backed by consumer spending?
With interest rates expected to hover around zero for the near future, investors looking to get the most out of their portfolios may need to consider hard assets that will weather a devalued U.S. dollar; like gold and silver. You may also want to consider stocks that tend to be “recession-proof” or are considered necessities, such as “death care,” health care, and energy.
With the U.S. economy starting to show signs of sustained life, you may want to even consider companies in the packaging and containers industry.
The point is: it’s not easy to find companies to invest in this climate. Investors have to be picky and look for those companies that perform consistently well, signal an upswing, or, like gold, go against the prevailing wind.