Macro Implications for Student Debt

(From Naked Capitalism Blog)

My brain translates: Me poor student- no buy house ever





Student debt is becoming a larger and larger component of household debt as can be seen here and here and here.  Although household debt (relative to GDP) is decreasing (more on the declining effect of monetary policy later), it is useful to think about how accelerating student debt is transforming household debt and the implications. 

Mortgages are by far the largest component of household debt but as can be seen from the first graph and from the above links, mortgages are not driving borrowing anymore, student debt accounts for most of the growth in household debt.

One of the meaningful differences between mortgage debt and student debt is that loans for houses leave the borrower with an asset- a house- that could be taken away if payments are not made.  Student loans however, leave the borrower (hopefully) with a degree that (hopefully) translates into a job with (hopefully) higher wages.

The delinquency rate on student loans has an alarming upward trend (second and third link) that I think will only get worse due to the growing portion of low-wage jobs (more later).

Macro Implication Possibility #1: Securitized Student Loans act like Securitized Mortgages

If student loans are similar to the way mortgages functioned in the financial crisis, there is a great risk for a similar crisis as student debt becomes a larger and larger portion of household debt.

However, federal student loans are a different class of debt because they are guaranteed by the federal government.  Therefore if a wave of defaults occurred, it wouldn't produce a credit crunch in money market funds like the defaults on mortgages did. 

But even if most student debt is backstopped by the government and can't infect credit elsewhere, if the percentage of private student debt loans (which do not have this backstop) is growing, then we still have to watch out for this problem.   It does seem likely the private loan percentage of student debt will grow as federal loans shrink and tuition costs increase:

 (From Equitablog)

Macro Implication Possibility #2: Consumption Suck

Secondly, even if there is no reason to worry about private student loans growing to a worrisome level, delinquencies suck consumption out of the economy.  Since student debt is so hard to get rid of (bankruptcy won't help, you don't have an actual asset- like a house that can be taken away) they debit your (presumably already low) income through garnished wages, taking tax refunds, etc.

(This isn't meant to represent causation, just a brainstorm of how these variables might relate to one other): Increasing tuition costs contribute to increased student debt.  Increased student debt decreases consumption by contributing to less types of other debt like home and car loans.  A low wage economy decreases consumption and increases the likelihood of default.  Defaults lead to even less consumption by taking way even more income.  These simple student debt relationships could contribute to the "new normal" slow growth forecast for the economy.