America Sits on $12.5 Trillion Household Debt – Thanks To Sleazy Student Loans

It is no secret that schooling in America is expensive. Any form of higher education, including basic college level comes with mountains of expenditure and, of course, debt. With college costs continuing to rise, a poll by Edward jones found that 83% of Americans claim they cannot afford it. And what of the 17% who can? Well, barring the privileged few who can skate away on family money, it means humongous loans that show no signs of abating. In fact, a recent study postulated, that these large debts are one of the primary reason household debt has once again risen to 2008 levels – when the stock market crashed.

The loan status

The latest fiscal quarter, ending on March 31, 2017, reported a household debt of $12.7 trillion, which surpassed the $12.68 trillion figure of the recession period. Adjusted for inflation, it would be even higher. This comes as no shock to financial analysts considering the trend of rising debt that has been noted for the past 11 quarters.

The big factors that play into household debt are credit cards, auto loans, mortgages and student loans. According to the federal reserve, for the first quarter of 2017, credit cards make up $764 billion in debt, auto loans contribute $1.17 trillion, mortgages $8.63 trillion and student loans comprise of $1.34 trillion. That makes the last category roughly 11.2% of the entire national debt, almost double the figure it was when the country last hit numbers like these.

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This is a familiar trend in recent times and all too expected. The last 13 years of income growth has failed to meet the rise in cost of living (30% rise in living expenses to 28% income growth). Healthcare has increased by 57% while food has gone up by 36%. People are increasingly finding it harder to bridge the gap and stay above water. Cash loans and credit card loans are an easy fix to the problem, despite being a short term one. However, this also means there are growing defaulters and rising interest rates which further adds to the problem.

Nominal Income vs Cost of Living, 2003 – 2016

Source: NerdWallet Inc

Student Loan in America

Over the last decade student expenses have gone up about 186%. The cost of education has been rising at roughly 26% since 2003, though for the first time, it seems to have finally slowed down. On the other hand, this could be due to falling attendance of college students, as more and more millennials find themselves unable to manage both studying, and paying for it. Attendance in for-profit institutions which offer four-year courses have seen a steep decline in registrations. The fall semester of 2014-15 saw a 13.7% decline. This means that more and more students are opting to either complete their education in public universities or directly join the work force.

However public universities, too, are not without their problems. Public universities have consistently increased tuition by 27% (or 20% when adjusted for inflation between 2007 and 2012. On average students paid $8400 in-state, while all others paid roughly $19000. Financial aides have also seen a steady decline with government funding falling 27% for the 5 year period ending in 2012. The first quarter of 2017 has seen a rise in 5 yearperiod ending in 2012. Over the past 5 years, student loan debt has increased by approximately $31.5 billion.

About 44.2 million Americans are in debt due to student loans in 2017. 32.2 million chose direct loans which amount to $1003.3 billion, 15.7 million opted for Federal Family Education Loans (FFEL) which make up $ 320.5billion in debt and 2.6 million went with Perkins loans which sums up to 1331.7 million. On average, each student is more than thirty-seven thousand dollars in debt. This a 70% increase from a decade ago.

The state of New Hampshire has the highest average debt, showing about thirty six thousand dollars per head while Utah has the lowest with eighteen thousand per head. In calculating per capita, Pennsylvania, New York and Michigan have the highest numbers with $5990, $5570 and $5330 respectively. The national average is $4920.

Rank State % with Debt Average Debt
1 New Hampshire 76% $36,101
2 Pennsylvania 71% $34,798
3 Connecticut 64% $34,773
4 Delaware 65% $33,849
5 Rhode Island 64% $32,920
6 Minnesota 70% $31,526
7 Massachusetts 66% $31,466
8 District Of Columbia 55% $31,452
9 South Carolina 60% $30,564
10 Ohio 66% $30,239
11 New Jersey 66% $30,104
12 Michigan 63% $30,045
13 Mississippi 62% $29,942
14 Maine 63% $29,644
15 Iowa 66% $29,547
16 Wisconsin 70% $29,460
17 South Dakota 73% $29,364
18 New York 59% $29,320
19 Illinois 66% $29,305
20 Alabama 52% $29,153
21 Indiana 61% $29,022
22 Vermont 62% $28,283
23 Kansas 63% $28,008
24 Georgia 61% $27,754
25 Virginia 59% $27,717
26 West Virginia 68% $27,713
27 Oregon 63% $27,697
28 Maryland 56% $27,672
29 Idaho 71% $27,639
30 Missouri 61% $27,480
31 Texas 56% $27,324
32 Kentucky 64% $27,225
33 Louisiana 51% $26,865
34 Montana 60% $26,280
35 Nebraska 60% $26,235
36 Alaska 55% $26,171
37 Tennessee 60% $26,083
38 Arkansas 57% $26,082
39 Colorado 56% $25,840
40 North Carolina 61% $25,645
41 Oklahoma 52% $24,849
42 Washington 57% $24,600
43 Arizona 56% $23,780
44 Nevada 47% $23,462
45 Hawaii 50% $23,456
46 Florida 53% $23,379
47 Wyoming 46% $22,683
48 California 54% $22,191
49 New Mexico 58% $20,193
50 Utah 41% $18,873

Source

Another alarming facet of this scenario is loan delinquency. With the increase in debt amount, students are falling further and further behind paying back the amount of money borrowed. In 2017, a 90-day delinquency, or a ‘serious delinquency’  has risen to 11.2%. A report published by the Consumer Federation of America (CFA) claimed that over $137 million had not been paid back in the last nine months of 2016. This is a 14% rise from the previous year’s default figures, which is definitely concerning, especially in light of rising stock market prices and growth of employment.

The Obama administration had funded a variety of payment plans and options to help borrowers from failing to pay their due. If you remember, the crash of 2007 resulted largely from the failure of the banks due to a large list of defaulters. Penalty imposed by collection agencies due to delinquency further complicate matters. Thus, the borrowers are left in a vicious cycle of ruined credit and choices.

What does it mean for the economy

While the overall trend is shockingly similar to that observed in 2007, experts are quick to note that the key differences make it markedly different. For starts, though education defaulters have risen considerably, defaults in housing market and mortgages are down to less than 2% (for serious delinquency) and 4% (for less serious delinquency, i.e, 30 days). It is true that credit card loans have shown an uptick in the last year, but not so much that it is of immediate concern.

Thus large scale loans are being paid back. Moreover, the overall trend of borrowing has been mostly trustworthy. Much more stringent measures when it comes to signing off on loans also help protect the interests of the lender and prevent liabilities in case of a failure. If the delinquency continues to rise in all sectors, it may be a point of concern, however we are not there yet and anyone who says otherwise is blatantly engaging in fear-mongering.

Transition to Serious Delinquency (90+ days) by Loan Type

And finally, when the market crashed a decade ago, we had very few data points to predict or understand what was going to happen. Now, with all sectors being carefully tracked, it is unlikely that such alarge-scale fall would happen again, especially via the same means.

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