Student Loans Destroying Consumption

Written by

Over the long Christmas Holiday weekend, The New York Times published For Poor, Leap to College Often Ends in a Hard Fall.  The post is a anecdotal essay correlating being poor and the inability of those who are poor to become higher educated.  This post shows how easy it was for the starring subjects to get loans, and how easy it was not to graduate and be stuck with bill anyway.

Monthly, we report on consumer credit noting that the majority of money flows into consumer credit is due to student loans.

The red line on the above graph is the growth of consumer credit after subtracting student loans.  Currently, not considering student loans – consumer credit is growing at $200 per year for every person 18 years or older in the USA.

Student loans, however, are not obtained by the majority of the population – most is targeted to a small group 18 to 26 years old.  The average debt burden on this segment per capita is growing at an annual rate exceeding $2,000.

Here are some random statistics from the American Student Assistance (ASA) website:

  • close to 12 million – or 60% of all students – borrow annually to help cover costs.
  • there are approximately 37 million student loan borrowers with outstanding student loan – and 14%, or about 5.4 million borrowers, have at least one past due student loan account.
  • among all bachelor’s degree recipients, median debt was about $7,960 at public four-year institutions, $17,040 at private not-for-profit four-year institutions, and $31,190 at for-profit institutions.
  • the average student loan balance for all age groups is $24,301.

The lead NY Times article, however, was not about those who graduated – but about those who dropped out.  Here the ASA website offered the following perspective.

  • nearly 30 percent of college students who took out loans dropped out of school, up from fewer than a quarter of students a decade ago.
  • more than half of students who take out loans to enroll in two-year for-profit colleges never finish. At traditional nonprofit and public schools, the percentage of students with loans who started college in 2003 and dropped out within six years is about 20 percent.

This past week Econintersect has featured an opinion piece The 21st Century Debtors’ Prison as well as Infographic of the Day: Graduating Our University Students.  These were a mixture of fact and opinion.  In this analysis post we will try to provide facts and perspective and refer you to the other sources for opinion.

One significant factor that differentiates the U.S. from other countries:  Many countries educate their young at no cost to the students.  It remains to be determined by other analysis which approach to funding higher education has any economic advantage.  At this juncture it appears that a generation is being saddled with debt they may not be able to repay – and that could well be the deciding factor in the economic analysis.

My weekend posts are geared to identifying specific elements of the USA economic system which are creating growing headwinds for future economic growth.  It is hard to believe student loans are a healthy societal benefit (or investment) in the future.  However, I have difficulty espousing solutions:

  • Is higher education’s purpose to provide specific skill sets, or just provide a broad general education for employers to finish the training? Are we graduating too many “arts” degrees?
  • With reduced funding levels, high school (secondary school) is graduating students with no specific skills.  Should secondary education be teaching specific skill sets such as mechanics, welding, agriculture, etc?
  • Should higher learning institutions be burdened with responsibility for educating in fields where there are jobs? Should the government be involved?  Business?
  • Should students be counseled before deciding their course of study (specifically jobs availability) or taking any student loan (showing how this burdens their future options)?

I do not believe there are any good or perfect solutions – but the current path for the USA is clearly wrong.  The USA is a consumption based economy, and the young entering the workforce are not able to provide economic tailwinds if they enter the economy already burdened with debt.

Other Economic News this Week:

The Econintersect economic forecast for December 2012 shows weak growth. The underlying dynamics continue to have a downward bent. There are recession markers still in play, and one of our alternate methods to validate our forecast is recessionary. All in all, not a great forecast – but not one which would cause you to jump out the nearest window either.

ECRI believes the recession began in July 2012. ECRI first stated in September 2011 a recession was coming . The size and depth is unknown. The ECRI WLI growth index value has been weakly in positive territory for over three months. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

/images/z weekly_indexes.PNG

Initial unemployment claims rose from 361,000 (reported last week) to 350,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here).

The real gauge – the 4 week moving average – continued to fall from 367,750 (reported last week) to 356,750. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2010 (blue line), 2011 (red line), 2012 (green line)

/images/z unemployment.PNG

Bankruptcies this Week: AuraSound

Data released this week which contained economically intuitive components (forward looking) were:

  • Rail movements (where the economic intuitive components indicate a moderately slightly expanding economy).
  • There were many important data releases this week which some use to forecast – durable goods, personal income – even gdp – I see little intuitive in these measures except trend lines.

All other data released this week either does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

Weekly Economic Release Scorecard:

[iframe src=”http://econintersect.com/cache/scorecard.html” width =”580″ height=”1700″ frameborder=”0″ scrolling=”no” ]

[iframe src=”http://econintersect.com/authors/author.htm?author=/home/aleta/public_html/authors/s_hansen.htm” width=”600″ height=”500″ frameborder=”0″ scrolling=”no”]

8 replies on “Student Loans Destroying Consumption”

  1. There is a simple solution:  Return bankruptcy protections to student loans.  This forces the government to have skin in the game with, instead of against the students (currently the government is making, not losing money on defaults). This will compel the Department of Education to actually do their job of pressuring the schools to provide high quality education at low cost.  They can and must lower the lending limits to begin with. 
     
    But until bankruptcy protections are returned, the invisible hand will remain broken, and all of the problems many of us have watched grow, and grow for years, will continue unabated. 
     
    See http://www.studentloanjustice.org/argument.htm

  2. Isn’t this really about who gets the benefit of consumption?
     
    Student loans are not a headwind to consumption. They are a tailwind to the consumption of a product in one sector of the economy at the expense of consumption of products in other sectors – but all credit driven consumption from one sector/supplier/product/service involves a choice and not being able to consume from other sectors or suppliers.
     
    Students who borrow for courses are consuming under the guise of investing for a better future. While those who fail or drop out might have debts that reduce their consumption of other goods and services like housing, automobiles, electronics, restaurants, cable TV and internet, they have already consumed educational services, providing employment and profits and creating demand for physical facilities for their education.
     
    There may well be unscrupulous providers and some of the product might be overpriced, but that is the same as for home sales, video games and automobiles.
     
    None of this is to say that there ought not be consumer protection laws, consumer education, product disclosure statements for individual courses and effective procedures for qualification.
     
    The private education lending lobby has gained one crucial advantage – student loans are in general not wiped out by bankruptcy. This is a crucial difference that deserves review.

  3. @Inquisitive , The concept that student loans are an economic tailwind at the time the student is borrowing the money to pay bills is true. But student’s generally live close to subsistence levels (bringing into question  the economic multiplier of a student going to school).  When a student graduates, student loan repayments will continue to press many into subsistence living. 
     
    This is not an argument against education – on the contrary, one of the biggest assets a society has is educating the young.  It is arguing the way we are paying for education is wrong.  Consider that the costs of education are increasing over 4 times faster than the general inflation rate.  Student loans are no longer a small portion of the expected earnings a student would receive on graduating – but are now a major tax on future earnings.  See graph below:
     
    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=CUUR0000SAE1,CPIAUCSL&scale=Left,Left&range=Custom,Custom&cosd=1993-01-01,1993-01-01&coed=2012-11-01,2012-11-01&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Monthly,Monthly&fam=avg,avg&fgst=lin,lin&transformation=nbd,nbd&vintage_date=2012-12-29,2012-12-29&revision_date=2012-12-29,2012-12-29&nd=1993-01-01,1993-01-01

  4. @econintersect I agree that US education system (and medical system) are grossly inefficient. They are both examples of excess expenditure for the achieved outcomes. I also agree that for those who can make it, education is the key to moving to the middle class from lower socio economic groups. I also agree that it is a personal tragedy for those who are unable to complete their tertiary education but have large bills that cannot be overcome by bankruptcy.
     
    The Australian system makes compulsory repayments a function of taxable income and preserves the real amount of outstanding balances by an increase based on inflation, thus limiting the degree of cost/harm suffered. I don’t know offhand whether loan balances survive bankruptcy (likley) and/or death (unlikely).
     
    Whether the multiplier is more or less I couldn’t say, but I expect you are likely to be correct as higher income people (as one would expect in the places where, and the people by whom, tertiary education is delivered) are more likely to save, compared to the people in lower socio economic communities. (But they will spend more in retirement so part of the multiplier is deferred rather than lost.)
     
    My point is that student loans actually increase and bring forward consumption of education compared to what it would otherwise be in the absence of financing. This then reduces the later consumption of different products and services. It promotes a sectoral  transfer from say automobiles to education and a substitution of lower cost housing for higher cost housing and within the finance industry a substitution with less aggregate housing loans to higher aggregate student loans.
     
    People criticise China’s over investment in fixed capital, but the US is overinvesting/overpaying (based on outcomes achieved for the cost) in tertiary education and medical treatment. Based on obesity and associated diabetes you could also say that a large minority in the US overinvest/spend on food.
     
    I expect that the education problem will resolve to some extent when:
    1. there are more youth employment opportunities (I regard youth unemployment as obscene.)
    2. there is much more awareness of the outcomes of taking student loans for high cost/low employment outcome courses. The NYT article’s story of the three girls will help this awareness.
     
    The fastest way to stop lenders making inadvisable college loans would be to remove protection from loss during bankruptcy, but this would have an adverse outcome on many smart, capable lower socio-economic youth, but protect many others from student loans that will be a burden.
     
    Class mobility could be achieved by scholarships instead. Free university education is largely a subsidy to the families in the top say 30% of socio-economic status (and therefore highly regressive in effect). Australia tried free university education for all but moved to a subsidised, partly “deferred contribution from later taxable income” based scheme.
     
    Those from the lowest quintile who are in the top say 20% based on IQ and SAT could be given scholarships with a full living allowance. They would also be given compulsory individual mentoring an hour a week. The living allowance and mentoring could then be on a reducing scale for those who were from higher socio-economic status, cutting out at say middle quintile. The fees scholarship would reduce and cut out at the bottom of the top quintile. Those not in the top 20% by IQ and SAT would have to pay full freight if they wanted to obtain a college education. Continued eligibility each semester would depend on not failing too many subjects including in aggregate over the course. For example you might have to pass 1/2 load in year 1, and 3/4 load in each subsequent year and not fail more than 4 subjects cumulative at any time. Perhaps the costs of repeating subjects after year 1 might be at the student’s expense (maybe through loans).
     
    The Australian HECS/HELP scheme is worthy of consideration.
    http://intranet.ecu.edu.au/__data/assets/pdf_file/0008/415574/HECS-HELP.pdf
    http://studyassist.gov.au/sites/studyassist/helpfulresources/pages/publications#Brochures2012

  5. @Inquisitive  very nicely discussed.  this is the type of coherent dialogue we need from the political leadership to recognize and solve this growing crisis.  you did not discuss in the above, but the majority of americans do not go to college.  the majority NEEDS technical training, and i do not want the student loan issue to cover up this educational defect.

  6. Student loans are a no risk for lenders, the government backs them. The lender collects the interest, but is guaranteed the base funds. If the student is in default eventually they will take their tax refunds for repayment. Student loan debt is nothing new ask most doctors how long it took to pay off their student loans.
    http://speedyloansearch.com/

Comments are closed.