When last we checked in on America’s enormous student debt bubble it was … well … it was still an enormous bubble.
Specifically, the amount of outstanding student debt in America is now larger than the entire USD junk bond market:
So you know, that’s a shitshow and by that we mean all of those student loans are never – ever – going to be paid off. As in you can just forget about it. It’s not going to happen.
The question then, is not “how are current and former students ever going to pay this off?” (again, they’re not). Rather, the question is precisely that posed in the piece we ran three weeks ago. Namely this: Who’s Going To Defuse The $1.3 Trillion Student Loan Bubble?
Implicit in that title is the idea that this is a ticking time bomb, but not necessarily for the financial system because after all, most of this debt is guaranteed by the government. Here’s what we said in the above-linked post:
The good news for the financial sector is that out of the $190 billion in securitized student debt, $150 billion of it is guaranteed by the government. The majority of student debt not securitized is also guaranteed by the government and so, there’s limited risk for the financial system. I guess.
The bad news is that this massive burden of student debt has implications for all kinds of things, not the least of which is household formation and as Goldman goes on to note, “the substantial majority of student loan default risk is borne by the US Treasury.” So it’s borne by taxpayers.
That household formation bit is critical. Consider this chart from Wells Fargo:
“The transition to homeownership continues to face a number of hurdles. Most immediately, a lack of starter homes on the market has limited buying opportunities and driven prices up faster than incomes,” the bank writes, in a note dated earlier this month, before adding that “student loan debt remains an even more formidable challenge to ownership [as] college goers who graduated with student debt have lower rates of homeownership than their peers who graduated without student loan debt.”
With that in mind, have a look at this rather disconcerting chart:
If you don’t think that has something to do with student debt, well then we would gently suggest that you talk to some Millennials, because it most assuredly does.
As we also noted in the post linked above, it’s not at all clear what the solution to this is, because barring an across-the-board loan forgiveness program, pretty much every idea that gets floated is insufficient to address the problem. Ultimately, this is probably going to come down to taxpayers having to eat this in order to ensure it doesn’t turn into a long-running hinderance to economic growth.
That is a bitter pill to swallow and to be sure, we’re big believers in personal responsibility (i.e. we do think it’s incumbent upon people who took out loans to try and repay them assuming the borrowers in question weren’t the victims of for-profit college fraud in which case the debt should be forgiven no questions asked contrary to what Betsy DeVos wants to do). That said, recall these charts:
There’s an argument to be made that the chart in the left pane is to a certain extent attributable to the government being too willing to extend copious amounts of credit to prospective students, but the bottom line is that what you see in that visual is entirely out of hand. In other words: it doesn’t matter what’s causing it at this point. If tuition is going to continue to outpace inflation to a degree that is as absurd as that chart suggests, well then you either have to make public college tuition free or else you have to forgive the existing stock of student debt that’s been incurred as that chart went parabolic and put new rules in place that limit the scope of government-backed borrowing and thereby discourage colleges from effectively piggybacking on the easy availability of credit to jack up tuition costs.
Bottom line: we think anyone who was not defrauded should, under normal circumstances, have to pay back what they borrowed. That’s called personal responsibility and it’s how the world works.
BUT – and this is a big “but” – these are not normal circumstances. So someone in Washington is going to have to figure this shit out.
Unless of course every Millennial becomes a Bitcoin millionaire, in which case I suppose all of this debt will be paid off within the next 12-24 months.