There used to be an interesting warning etched into the side mirrors on cars. It read: “CAUTION — OBJECTS IN MIRROR ARE CLOSER THAN THEY APPEAR.”
It always struck me as odd that the warning was necessary. Are a bunch of people driving around and thinking: “That truck in my mirror is only two inches tall and looks to be far back, so I’ll just move on over”? Don’t they verify the position — and size — of traffic by turning their heads? Maybe. Maybe not. It’s entirely possible that the warning is necessary, since people time and again show they are very bad at judging risk, right up until something very bad happens.
That warning came to mind as I read a reasoned, lengthy rebuttal to fears about student loans holding back millennials. The writer pointed out that only a small minority of people has any student loan debt at all, and of those that do, the true amount of debt — not the average — is manageable. Hmm.
This line of thinking ignores a few basic facts…
It’s true that most Americans don’t have student loan debt. That’s because most Americans didn’t go to college, and a majority of millennials still don’t go on to higher education. These young workers tend to hold jobs with significantly lower pay than those taken by college grads, and they also have fewer opportunities to move up. The fact that they don’t have student loan debt is not much of a positive.
At the same time, those with post-graduate degrees tend to have the highest amounts of debt. The argument goes that these people also have the highest earnings, so who cares?
I care, and so should we all.
Just because debt rises with income potential doesn’t mean that the debt is inconsequential or otherwise manageable. For the newly-minted physician or lawyer with $150,000 in debt, the monthly payment of $1,200 is still money they could have spent elsewhere, helping our economy grow.
But perhaps the greatest blind spot in the reflection on student loan debt was the lack of analysis on what happens when the debts go sour. Looking at how many people fall behind on their loans by more than three months, or the 90-plus day delinquency rate, should give us some indication of whether or not the funds are used wisely in our society, and are therefore manageable. The answer, once we’ve delved into the numbers, isn’t positive.
The Federal Reserve Bank of New York recently published data on credit in the U.S. Student loans have grown dramatically over the past decade. They now stand at $1.12 trillion. That’s more than every type of loan available, save mortgages.
Stop and think about that for a minute. A trillion is such an inconceivable number that we tend to just feign shock and then quickly dismiss it, because it’s hard to understand. Tony Robbins describes this well in his seminars.
He asks: “How long is one million seconds?” The answer is 11.5 days. How about a billion seconds? It doesn’t sound like that much more, but it is 32 years! The difference is dramatic. As for a trillion seconds? That’s 32,000 years. Moving from a million, to a billion, to a trillion is so big of a change as to almost defy comprehension.
Student loans have another distinction — they have the highest rate of delinquency among the major types of debt that the New York Fed tracks, clocking in at 11.3%. The problem is that this figure is misleading. Because of how student loans are treated, the real number is much higher.
When students sign on the dotted line to take out loans, their repayment doesn’t begin immediately. Their loans are put on hold while they’re in school. This makes sense, but it is ignored in the 11.3% delinquency figure, which is based on all loans outstanding.
Along with in-school status, there are several other student loan classifications that shrink the pool of loans currently being repaid. Using data from the National Student Loan Data System and combining direct loans with Federal Family Education Loans (FFELs), the total of all loans backed by the government fall into these categories:
The 11.3% delinquency rate has to be adjusted for the fact that barely more than half of all student loans are in repayment. Dividing 11.3% by 51.78%, the percentage of delinquent loans among those actually in repayment soars to 21.8%, or slightly more than one in five.
If student loans are so efficient at providing people access to education, which greatly increases their earning potential, then why are so many loans delinquent, and almost 10% of all loans in default?
When it comes to such debt, I think the warning should be:
“CAUTION — LOANS OF THIS TYPE ARE MORE DANGEROUS TO YOUR FINANCIAL FUTURE THAN THEY APPEAR.”
The proof of the warning is showing itself in other areas, like the severe drop in the number of young first-time homebuyers. Without strong participation from the millennials, the housing industry can’t recover, which means we won’t see a rebound in construction-related, middle-income employment, and we won’t enjoy the economic benefits of credit creation through mortgage lending.
This hole in our economic recovery will hold back the gains we anticipate from the rising millennial class as they walk up their own spending wave, and will impede our growth for years to come.
P.S. The habit of glossing over breakdowns in our economy and financial system is all too real; we read it every day in the financial press and hear it from central bankers and regulators. For an unvarnished, spot-on description of where things really stand, watch this interview with David Stockman and Harry Dent…