1.5T Reasons to be Worried

1.

5T Reasons to be Worried…and why $1.

5T is only the start of the Student Loan problemJordan BeanBlockedUnblockFollowFollowingMay 6The average student loan borrower is more than $30,000 in debt.

Maybe this represents your situation, maybe it doesn’t.

Regardless, the repercussions of student debt touch every person because the impact of these loans can mean more than $4,000 owed per taxpaying American and significant headwinds to annual growth.

An extra $350 in student loan payments — the approximate payment for an average borrower — is less money injected into a local economy through eating out or shopping locally; it’s less trips that support tourism-driven regions; it’s less money saved for retirement.

Education is an investment that pays off over time — this is well studied and proven.

But, it doesn’t pay off for everyone equally, and there’s a limit to its value when considering the adverse mental and financial impact to a borrower.

Consider these facts:For every $1 in government loans today, at least ~$0.

15 are unlikely to be repaidThe average borrower could live for free for 2 years with the money to pay back the debtThe economy is losing out on ~$15B in spend per monthThe problem is getting worse in the face of economic recovery and prosperityWhere are we today?The total outstanding balance (inclusive of principal and interest) of federal loans has increased nearly threefold in just over a decade, driven by the exponential growth of direct loans with a mild decline in Federal Family Education Loans (FFEL)……as the number of recipients has leveled off.

The logical conclusion?.The average balance per unique borrower is increasing:Let’s think about what these numbers mean a few different ways.

For someone that holds the average amount of student debt in 2018, that amount represents:Rent for a one-bedroom apartment for 24 months, based on the average rent in the U.

S.

(~$1,405 / month)Buying more than 12 and a half years of food, based on the average amount spent on food per year per person (~$2,641 / year)15% down payment on a house, based on the median home value in the US (~$226,300)More than $80,000 of opportunity cost for retirement savings, assuming the monthly payment over 10 years is instead invested at a 5% return, then that amount grows for 20 years until retirementIt’s getting worseNot only is the amount growing, but the ability of borrowers to repay is declining.

When someone can’t pay in the short term, the amount doesn’t only not go away, but the interest grows.

And, this is happening during an economy in the midst of the second longest (118+ months) economic expansion in our history.

What happens to this debt during a recession?Since Q3 2013, Direct Loans outstanding have grown by 102%; Direct loans in default have grown by more than 225%The government is on the hook for hundreds of billions of dollars in losses in the coming years, which in turn puts the taxpayer on the hook for hundreds of billions of dollars of losses.

If we assume ~130M tax paying citizens, that comes out to more than $1,700 owed per tax payer today, and that’s a conservative assumption — surely some loans currently in “good standing” will transition to defaulted loans, in addition to future defaults on new loans issued.

Think this doesn’t sound like too much?.Consider this:The median savings account is less than $5,00080% of Americans report living paycheck to paycheck.

Consumer spending accounts for ~70% of the U.

S.

economy, so spending cannot slow down for the economic health of the country.

Not only can most people not afford an extra $1,700+ in tax, but the economy can’t afford it either.

How did we get here?Two of the reasons that this crisis is escalating is that college is becoming more expensive and the value of a degree is increasing.

Shades of blue = College prices indexedThe cost of college at public schools, indexed to 2000, has grown to 2.

218; CPI has grown to 1.

376; median earnings are at 1.

013.

The whole “I paid for college with a part-time job in the summer” anecdote doesn’t work anymore.

At the same time, the difference between having a college and a high school degree has never been greater:People can’t afford not to get a degree at the same time that they can’t afford the degree itself.

Distribution of DebtThe debt is not equitably distributed.

Depending on your state, major, and race, there are varying levels of debt and ability to pay.

The map below colors states (excluding North Dakota) by the difference between the average salary and the average debt load.

The number represents average debt.

So, for example, while California has relatively lower debt than Oregon, the ability of Oregonians to pay is higher based on average salary.

By major, expected income varies too.

Want a high paying major?.Clearly, go for Engineering:Passionate about the arts or non-profit and want “high meaning” (meaningful) work?.That doesn’t pay, but you still pay for the degree:Colleges charge the same amount to every student despite having different expected salaries by major.

Is this fair?.Should different majors have different caps for borrowing limits?On race, the WSJ did a deep analysis recently on how student debt affects graduates of historically black colleges more than others:The Student-Debt Crisis Hits Hardest at Historically Black CollegesLong a path to financial security, traditionally African-American schools are now producing graduates who struggle with…www.

wsj.

comWhat’s Next?For every dollar of student loans, ~15 cents goes into default; The typical delinquency rate at a bank is ~1.

57 cents.

Too much money is being given out without regard for whether people can pay it back, and we’re all on the hook.

Here’s an estimated base case, upside case, and downside case forecast for the coming 5 years of federal loan defaults based on historical trends and the impact that a recession could have on default rates:Bars = Forecasted total federal loan volume; Lines = Estimated loan defaults and forebearanceI estimate there’s little upside to improve and significant downside risk should a recessionary environment be approaching and student loans follow the same path as consumer loans during the last recession.

What do you think?Are student loans a problem?.Is the solution to wipe out all student debt and start fresh?.To promote income sharing agreements?I argue that there should be more accountability on the universities to produce in-demand skills and graduates that are employable and ready for the variety of fields that are needed in today’s economy.

With nearly all of the risk of repayment on the government and private lenders — absent penalties for very poor student performance — there’s a slight misalignment of incentives.

The university is made whole once the loan is distributed.

What if the loan were partially conditional on employment 6 months after graduation?.On full repayment of the loan?The status quo can’t continue or we should expect the same results.

The same results will mean more government risk, continued high default rates, and the burden to compensate for these losses with new or higher taxes.

Have any feedback or comments?.I’d love to hear from you!.Feel free to connect with me on LinkedIn or email me at jordan@jordanbean.

com.

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