U.S. Student Debt To Reach $1.4 Trillion by 2020

March 14, 2012 05:23


[O]utstanding direct federal student loan will reach $1.4 trillion by 2020 representing roughly 7.7% of gross debt. This is 6.3 percentage points higher than it would have been had the scheme not been nationalized.

By EconMatters

Student loan debt is surging, partly boosted by many who became unemployed during the Great Recession going back to school hoping for a better job prospect.  An analysis by the Federal Reserve Bank of New York (FRBNY) showed that student loan debt stands at $870 billion nationally, surpassing the nation’s outstanding balance on auto loans ($730 billion) and credit cards ($693 billion) as of third quarter, 2011.

Of the 37 million borrowers who have outstanding student loan balances, 14.4%, or about 5.4 million borrowers, have at least one past due student loan account. Together, these past due balances sum to $85 billion, or roughly 10% of the total outstanding student loan balance.

 

 

 

However, the majority of total lending comes from federally backed loans, whose repayment is deferred until the student graduates from school and can then be pushed back by another six-month grace period. So since no payment is due until graduation, these deferred student loans, although included in the total balance, are excluded from the calculation of past due balance. FRBNY estimated that as many as 47% of student loan borrowers appear to be in this bracket.  To adjust for this distortion, FRBNY did an estimate by excluding this class of borrowers, and found 27% of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21%.

A couple of new laws in 2008 and 2010 has made the U.S. government the sole supplier of Federal student loans, rather than just the ultimate guarantor.  That means student loan is now part of the gross U.S. national debt.

Falling state government support for public higher education has put pressure on public universities and colleges to raise tuition and reduce the education quality.  Federal aid is also running dry.  For example, Federal loan subsidies for graduate students will seize in July 2012.  Those federally subsidized Stafford loans for graduate students, which used to not accrue interest until after graduation, will start accruing interest at a fixed rate of 6.8% while borrowers are still in school.  Furthermore, with globalization and rising total labor supply, a college degree can no longer guarantee a high wage needed to pay down student loan.

These factors could conspire to form a vicious cycle pushing student debt higher and higher.  Council on Foreign Relations (CFR) projected the outstanding direct federal student loan will reach $1.4 trillion by 2020 representing roughly 7.7% of gross debt. This is 6.3 percentage points higher than it would have been had the scheme not been nationalized (See Chart Below).

 

 

And according to a recent survey by the National Association of Consumer Bankruptcy Attorneys, more than 80% of bankruptcy lawyers have seen a substantial increase in the number of clients seeking relief from student loans in recent years.

All in all, in the near term, perhaps calling student loan the next debt bomb to cause another financial crisis might be a bit of an exageration, since banks are not that exposed to these debt as in the case of the subprime mortage.  Nevertheless, the added weight on the gross national debt as well as the dis-incentive for people to seek better education would prove to be one of the greatest risk for America as a whole.

 

© EconMatters All Rights Reserved. Used by permission.

 



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