Since the financial crisis, most market observers and economists have cheerfully ignored the aggregate student-debt load in the US, which recently swelled to an economy-threatening $1.4 trillion. Even as student-debt, which can't be discharged in bankruptcy, grew to represent 10% of the total US debt burden, defenders of the status quo pointed to declining default rates as evidence that the government-backed student loan industry wasn’t in danger of imploding.
But that may soon change.
As Bloomberg reports, the student-loan default rate in the US ticked higher during the second quarter for the first time since 2013. While it’s only one quarter of data, it should send a chill down the spine of government and private lenders, who have every reason to worry that this could be more than a temporary blip.
To wit, the share of Americans at least 31 days late on loans from the U.S. Department of Education ticked up to 18.8% as of June 30, up from 18.6% during the same period a year ago, according to new federal data. Meanwhile, about 3.3 million Americans have gone more than a month without making a required payment on their Education Department loans—up about 320,000 borrowers.
The rise interrupts a period of 12 straight quarters of declines in delinquency rates, according to numbers dating to 2013. It also comes at a time when US economic growth is nominally expanding (the BEA announced earlier today that the US economy expanded by 3.1% during the second quarter, an improvement over its previous estimate).
While the uptick may be small compared with the 17 million debtors making student-loan payments, according to Bloomberg, it has baffled economists, who’ve struggled to find a suitable explanation.
“There's no fundamental reason for that to be happening,” said Yelena Shulyatyeva, senior U.S. economist for Bloomberg Intelligence. After all, she said, the U.S. economy has improved since June of last year, with lower unemployment, higher household incomes and increased wealth, federal data show. Consumers are more confident about the economy and their own personal finances, too, according to Bloomberg Consumer Comfort data.
In the name of generosity, let’s assume that these economists aren’t being willfully ignorant, and that the argument that there are no “fundamental reasons” for the uptick in delinquencies is grounded in some type of institutional shortsightedness.
To be sure, when it comes to the precarious finances of student-loan borrowers, nothing has changed in the past three months. Instead, we’d posit that the US’s massive pile of student-loan debt has for years posed an underappreciated threat to the US economy.
Case in point: The recently released Student Loan Debt and Housing Report 2017, an annual study conducted by the National Associated of Realtors, confirmed that many borrowers are putting off moving out of their parents’ house, purchasing homes, and myriad other purchases because of their student debt.
The U.S. currently has a student debt load of $1.4 trillion, which accounts for 10 percent of all outstanding debt and 35 percent of non-housing debt. The magnitude of the debt continues to grow in size and share of the overall debt in the economy. While this amount of debt has risen, the homeownership rate has fallen, and fallen more steeply among younger generations.
Student loan debt impacts other life decisions including employment, the state the debt holder lives in, life choices such as continuing education, starting a family, and retirement.
Twenty-two percent were delayed by at least two years in moving out of a family member’s home after college due to their student loans.
Among non-homeowners, 83 percent cite student loan debt as the factor delaying them from buying a home. This is most frequently the case due to the fact that the borrowers cannot save for a downpayment because of their student debt. Among homeowners, 28 percent say student debt is impacting the ability to sell their existing home and move to a different home. The delay in buying a home among non-homeowners is seven years and three
years for homeowners.
But perhaps the most dismaying evidence was when the NAR tried to gauge “buyer awareness” – i.e. the student’s understanding and frame of mind when they first applied for the loans.
- Before attending college, 28 percent of borrowers knew generally the school “might be expensive” or “might be cheap”, but had no further information.
- More than one-quarter of borrowers had an understanding of tuition, but had little understanding of other costs such as fees and housing expenses.
- One in five borrowers understood all the costs including tuition, fees, and housing.
After offering a handful of specious explanations, ranging from a rise in the number of debtors actively making payments, to the notion that the best borrowers have already “graduated” (i.e. paid off their loans), Bloomberg offers a nugget of sense.
Finally, Tarkan said, there could be a simpler reason: Maybe more Americans just can’t afford their monthly payments.
Sometimes, the best explanations are also the simplest.