The student loan debacle

Well, yesterday panned out largely as expected, with bond markets buoyant and equities following suit.  If the dollar fared a bit better than expected given the fixed income rally, at this juncture it seems more reasonable to attribute that to a few modest positional adjustments than any canary-in-the-coal-mine style warning sign.

One FX cross that's put in some interesting work recently is AUD/NZD, which responded smartly to Wednesday night's RBNZ statement calling for further FX depreciation.  Such calls, in various guises, have been a regular feature of RBNZ statements for a long time now; that the kiwi responded is perhaps a sign of where positioning is?   In any event, this is not a declaration of victory for Macro Man's bullish framework sketched out a few weeks ago, as there is no victory to declare.   Spot is basically where it was when he bought it; as noted at the time, he sized it small enough to wear a drawdown, which he was fortunately able to do.    The chart's looking pretty constructive from here, so he'll continue to run with it and see if the cross bats on.

Over the last week or so Macro Man has addressed a few issues that in his opinion have below-optimal levels of growth and/or inflation.   Today he's like to address one that is broadly known but perhaps under-appreciated because its impact is difficult to quantify- namely, the issue of student loan debt in the United States.

As most readers will be aware, the cost of higher education in the United States a) is exorbitant, b) has risen sharply over the past couple of decades, and c) is at least partially fueled by the student loan industry, in which the government guarantees the debt taken on by students to finance their education...but with the downside (for the students) that the debt is almost impossible to discharge, even through bankruptcy.

All of this would be well and good if the returns on a college education exceeded the NPV of the debt required to finance it.   While this may well still be the case in aggregate, for a growing proportion of students and graduates this condition appears not to hold.

The student loan industry really dates back to 1973, with the creation of Sallie Mae.   When looking at a chart of higher education inflation, we can clearly see an uptick at the time that Sallie Mae came into being.   (Granted, the 70's were an inflationary decade all around.)   For most of the intervening period, higher education inflation has comfortably outstripped both headline and core measures.  Fortunately, college inflation is at its lowest levels in 35 years (if you can believe the data.)

Unfortunately, even the current modest increases in education inflation (from grossly inflated absolute price levels, mind you) both overshoots the earnings growth of college graduates and undershoots the amount of debt being taken out to finance the costs of a college education.   As noted above, the data is difficult to come by to perform an exhaustive cost-benefit analysis of attending college at present; what we can say, however, is that the cost-benefit tradeoff has deteriorated badly  over the past fifteen years.

Starting in 2001, the BLS has published median weekly wages for the second quartile of college graduates over the age of 25.   We can take this data as representing the reward for attending college, though it likely overstates the immediate benefits to recent graduates (not all of whom can procure "professional" jobs.)  In any event, if we index the wage growth of college grads with the cost of attending college since 2001, the picture that emerges is not very pretty.

While we cannot say what the absolute NPV of a college education is, we can say that it appears to have gone down in recent years.  Even this, however, undersells the burden placed on recent and future college grads.   Student loan growth has comfortably exceeded that of college inflation since the loan data became available in 2006.  While this would perhaps be understandable and acceptable if the student population were growing in line with loans, in fact the contrary is the case.  According to the Department of Education, fall enrollment in post-secondary institutions declined from 21.02 million in 2010 to 20.21 million in 2014, the last year for which data is available.  Over the same period, student loan debt outstanding ballooned from $855 billion to $1.36 trillion.

Of course, these numbers also represent the stock of previously-acquired debt that has not yet been paid off.  While we can guess how much  is taken on by current students, it's hard to know for sure.   What we can say, however, is that the amount of outstanding student debt has tripled in the last decade....and wage income for college graduates has not.   Debt per borrower is available on a state-by-state basis from TICAS; as you can see, the CAGR of per capita debt handily exceeded that of wage growth from 2004-2014.

Moreover, the percentage of students taking on debt has generally increased as well.

So Generation Z, or Millennials, or whatever you want to call them, as a cohort have paid more for college, taken on more debt, and have lousy earnings prospects.   And the thing is, the debt is largely inescapable.   And the worst bit of the whole sordid scenario?   The Federal government owns most of the debt.

That's right, the very people who have the power to change the bankruptcy laws to give students the same flexibility with debt that a certain presidential candidate has exploited on numerous occasions during his business career are the ones who are reaping the benefit of the inescapability of the debt!  Quite literally, the government is in the loan sharking business, with that cohort of the workforce that is the foundation of future economic growth as victims suckers clients.

You want household formation to increase?  You want consumer confidence to improve?  Fix the student loan debacle.  It might not be a panacea for reviving economic growth, but at least it won't be an albatross perched on a millstone around the neck of the youngest cohort of the workforce.