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.
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checkmate
admin
September 23, 2016 at 9:29 AM ×

Pretty much ditto for the UK. Also another issue where averages distort the real picture. I'm pretty sure the data will suggest that for a relatively small segment of the student population the costs of higher education will be covered and of course will uplift the aggregate picture. In doing that it will hide the fact that for far more students these costs might just as well have been pissed up against the wall. Actually having seen a few of those walls recently this is a little more literal than otherwise intended. Nonetheless what would the labour force numbers etc look like if we were to start laying this out according to strict cost and management practice ? Mr Taylors output gap would not look so pretty would it and against that we have to balance the virtue of having relatively engaging Barristas etc.
I suppose a more honest appraisal of the situation would be for us to bluntly admit to young adults exactly what our elected govts have been doing for the last 20 to 30 years. Which is using higher education to offset the effects of globalisation and aging demographics and pretending that personal costs taken on are worth it.

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Anonymous
admin
September 23, 2016 at 10:37 AM ×

Well, in addition to gov guaranteed cheap student loan (margin 0,5% plus euribor) that can be deducted from future taxes (provided graduating in time) and flexible repayment schedule, in Finland we get very nearly cost free education and 500€/mo allowance to boot. And still our economy blows.

Of course there's the idiosyncratic factors at play like collapse in trade with Russia and annihilation of Nokia mobile devices...but my point is (nearly) debt free higher education is no panacea. What's the point of having an army of engineers if nobody builds factories anymore? And it doesn't take a degree to change the diapers of the elderly...

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washedup
admin
September 23, 2016 at 12:30 PM ×

@anon 10:37 - which is precisely why in Finland public elementary (and for that matter middle and high schools) are top notch while they suck, on average, in the US - because a) the quality of teachers is the game changer for early education and b) smart people have no incentive to become teachers - how could you, when working on wall street is the only way to repay the loan you took to study art history in college, which you probably wouldn't have chosen as a major if you had been exposed to stem from an early age?
If there was a venn diagram of sh$tty vicious circles when it comes to the topic of education, the US would be right in the center with Nigeria - its saving grace has been the achievement of past generations, highly skilled immigration into higher education, and reserve currency status, but theres no doubt that will be duly f@3d up in the coming decades.
Let's also remember that any fix to the student loan debacle would take 3 decades to pay off - you think our twitter and kardashian obsessed populace has the patience for that?

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Nico G
admin
September 23, 2016 at 12:35 PM ×

"how could you, when working on wall street is the only way to repay the loan you took to study art history in college, which you probably wouldn't have chosen as a major if you had been exposed to stem from an early age? "

absolutely brilliantly put

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Anonymous
admin
September 23, 2016 at 2:02 PM ×

It's a crime. My son pays more for books than I paid for tuition. And he is currently attending a community college while I went to a "major" university. He pays more tuition for a single semester than I paid total for three years of graduate school, in fact, about twice as much. It breaks my heart. The government caused this just as it totally destroyed affordable health care. The reason this is not obvious to everyone is that it took a couple decades to get here.

Rossmorguy

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checkmate
admin
September 23, 2016 at 2:25 PM ×

The government 'destroyed' nothing. We the voters (in the UK and US) allowed goverments to tell us what we wanted to hear and then act accordingly. When it comes to responsibility, OWN IT !.

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Flowthrough
admin
September 23, 2016 at 2:27 PM ×

The stats I have seen show that a very small % of student population have a very large loan balance and a small % have very large loan balances.
39% have a loan balance under $10,000 , 28% have a loan balance between $10,000 and $25,000 and 18% between $25,000 and $50,000.
Now you also have to account for those with "for profit collage" loans, who are either in trouble, or will have loans forgiven. The art history major who has a big balance goes to work for a non profit or government and has loan forgiven in 10 years.
I am not suggesting college costs are not a rip off (and university professors salaries have a lot to do with that), or that the debts should not be dischargeable in bankruptcy.
But on a list of issues impacting economic growth in the US, I doubt it make the top 100. Not a major, or even minor concern for economy as a whole.

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Anonymous
admin
September 23, 2016 at 2:37 PM ×

The ROI is worse than many think:

https://fred.stlouisfed.org/series/LNS11327662

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Anonymous
admin
September 23, 2016 at 2:47 PM ×

How's this for helicopter money: forgive the debt. All of it.

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Skr
admin
September 23, 2016 at 3:01 PM ×

The old ones are the best ones...

It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher. The Butcher takes the 100 dollar bill and runs to pay his debt to the pig raiser. The pig raiser takes the 100 dollar bill and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town’s prostitute that, in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

Now who do the US owe trillions too?

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Anonymous
admin
September 23, 2016 at 3:08 PM ×

If the government stopped guaranteeing student loans today, the whole mess would be cleaned up within five years. If I could make that happen, that is, if I owned it, I would.

Rossmorguy

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Anonymous
admin
September 23, 2016 at 3:22 PM ×

As of July, 2016, 6.9 million Americans with student loans hadn’t sent a payment to the government in at least 360 days, quarterly data from the Education Department showed this past week. That was up 6%, or 400,000 borrowers, from a year earlier.


http://www.wsj.com/articles/about-7-million-americans-havent-paid-federal-student-loans-in-at-least-a-year-1440175645

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Macro Man
admin
September 23, 2016 at 3:34 PM ×

@ Flowthrough While the median studenty loan may indeed be modest by the earnings standards of a professional person, the breadth has risen sharply...from 2004 to 2014, the number of people with student loan debt rose from 22 to 43 million. That's now more than half of the population between 18-34 saddled with a debt they essentially cannot escape, and anticipated earnings growth lower than previous generations. By a stunning coincidence, household formation and home ownership amongst this age cohort has plummeted. If you don't think this is one of the top 100 economic problems facing the US...well, the most polite thing I can say is that you are wrong.

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johno
admin
September 23, 2016 at 3:42 PM ×

Agree with MM's assessment of AUDNZD price action. Added to position in early Asian hours last night, purely on that.

FMPM remarked on the strong USD action yesterday. Indeed. While not selling EM bonds, this morning went long USDTRY, USDZAR, USDKRW, effectively turning it into a rates position. Exited USDMXN yesterday. Hasn't felt right all year, and still doesn't. Curious if anyone has views on EURNOK here.

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Anonymous
admin
September 23, 2016 at 5:00 PM ×

I have a small position of AUDNZD for a while as well and thank you for the analysis.

Now, off the topic on yesterday Mr T's comment on risk premium of nasdaq, is 2.7% an unusually low? I had not done a thorough study but a google search gives me the 3%-5% range of risk premium. I wonder if this could help one make some trading decisions.

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Siesta
admin
September 23, 2016 at 5:01 PM ×

MM . Like you, I spent a fair amount of time working in London and our kids all have dual citizenship now. We are back in CT and my cunning plan of sending the kids to university in the UK has fallen to pieces - I just learnt that they are ineligible for local tuition(9k gbp a year) as they need to reside in the UK for 3 yrs prior to enrollment. Of course, even the overseas tuition is half the price of my alma mater here in the US, but perhaps we should pool our resources and send the kids to live in Blighty with one of the very generous readers you have here. Maybe throw in a free subscription to the blog ? At the rate cable is going the UK education will be easily 1/5 the price of the US.

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Anonymous
admin
September 23, 2016 at 5:21 PM ×

Have you all considered to send your kids to China if you are desperate enough?

It should be quite easy to get into the top three universities (Tsinghua, Peking, or Fudan) as foreign students? And the scholarship for international students in China is quite easy to get as well. Even without the scholarship, it is much cheaper compared to US/UK.

I know many people do not trust the quality of Chinese high education. But consider this, a huge potion of undergraduate students in STEM in those top Chinese universities will get right into the top graduate programs in the US with scholarship/assistantship after 4 years of undergraduate study. So the classmates' quality is pretty close to the top rank anywhere.

The downside will be that drug is not that easy to get in Chinese campus and there is really no football or baseball games and any top sport games to watch. But upside is that you will have your retirement money saved!

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Anonymous
admin
September 23, 2016 at 8:15 PM ×

http://www.trendfollowing.com/2016/03/03/ep-429-jim-rogers-interview-with-michael-covel-on-trend-following-radio/

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yassa
admin
September 23, 2016 at 9:56 PM ×

Siesta - this is going back nearly a decade now but I, too, am/was a pondhopper and certainly had not lived in the UK the three years prior to uni but managed to talk my way into home fees (3k in those days!)

Definitely worth making the effort to go to the interviews etc and discreetly see what's what.

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amplitudeinthehouse
admin
September 24, 2016 at 3:13 AM ×

"THE STUDENT LOAN DEBACLE"

Cheer up!..Macro Man. All's not lost. This week spelled out that the Fed chairwoman and Boj chairman are still having fun implementing low rates and accommodating measures.
And in another 30 years from now the central banks may well be still using low rates...seriously doubt that, but..years from now their respective stock markets that they'll eventually leave behind will have telling features embedded within it expressing a financial behaviourism that will be studied and followed for years to come.

And just maybe..the central bankers will be still singing "we'll still the one....we're still having fun"

https://www.youtube.com/watch?v=1WUP7q0dUCM

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Nico G
admin
September 24, 2016 at 3:30 PM ×

meanwhile in China nothing to see

The BIS is rightly concerned about spillover from China to the global economy. After noting that outstanding loans in China have reached $28 trillion – as much as the commercial banking loan books of the US and Japan combined – Ambrose adds, “The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night.”

Total Chinese debt reached 255% of GDP at the end of 2015, a jump of 107% in the past eight years – and still rising fast. Every year, China’s leadership promises to rein in debt growth, and every year the growth just keeps accelerating. That is because China’s GDP growth is fueled by debt, and that debt is becoming increasingly inefficient in producing GDP.

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Flowthrough
admin
September 24, 2016 at 5:59 PM ×

Macro Man, I enjoy you blog and thank you for being polite. I have been wrong before and no doubt will be wrong again.
But let's combine some numbers. 43 million Americans have student loans.

Per my numbers, 16.77 million have loan balance under $10,000. So while not great, this small a balance is unlikely to impact them in a meaningful way. Agree?

12.04 million have balance between $10,000 and $25,000. I would argue that within this group, the student loans are an inconvenience, and may impact day to day expenditures, but not major events. Now I think within this group it is fair to disagree, and if you do, it is fair to argue that student loans are a problem for the economy as a whole.

You are now left with 14.19 million (and note this includes 7.74 million with under $50,000). Almost 1/2 of those are in default and have not made a payment in over a year (based on Anon 3:22). Note, I have assumed most of those in default have a loan balance over $25,000. My guess is that is not far off the mark.

Now those in default do not have their expenditures reduced, but may be cut off normal credit. But as with many things, I am sure most find a way around these problems.

So around 7 million have large loan balances and are not in default. A bit more than 2% of the population. Of that group, you have some working for government or non profits with income based payments and forgiveness after 10 years. And you have some doctors and lawyers (both law school and medical school are very expensive) who are able to make their payments and afford a reasonable lifestyle.

So I think we are talking about something impacting in a major way far less than 2% of the population. Now again, on an individual level it is truly a tragedy, and often those impacted are those from modest means whose parents did not go to college and were unable to advise them. Just not sure the overall impact on the economy is that great.

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Anonymous
admin
September 24, 2016 at 11:19 PM ×

ok so what's your point? Forgive all student in the name of "growing the economy"? What about the people who paid their own way? parents who saved? People who didn't go to college? How will we pay for all that free college? Increase taxes? Do you actually think that will stop the growth in the cost of college? How about all the people who will try to go to college that wouldn't have otherwise(cost increase)? Implying free college and forgiving student debt is somehow a good thing is absolutely insane.

P.S. for those of you who actually think H1B visas(highly skilled immigrants) have kept the U.S. afloat are grossly misled. They take jobs from Americans and keep wages down. Sure it helps quicken innovation but it makes it tougher 1) for an American to become employed (pay back loans quicker/sooner), 2) to get a raise (pay loans while consuming other goods). At my company we hired someone on a H1B visa. Sure he's qualified but he got the job over an American. That American very well could have done the job if given the chance and training.

On purely economic reasons mass immigration and H1B visas are clearly damaging to the US. This doesn't even delve into the cultural aspect of how people of different races, religions, and beliefs change(for the worse) our neighborhoods, communities, political systems, values, and beliefs. The fallacy of multiculturalism, diversity, and globalization needs to be upended. Ever wonder why we were such a successful country in yesteryear? Look at the demographic shift.

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wcw
admin
September 25, 2016 at 12:24 AM ×

@Flowthrough, this will have an impact: https://fred.stlouisfed.org/graph/?g=7pia

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Anonymous
admin
September 25, 2016 at 5:32 AM ×

"On purely economic reasons mass immigration and H1B visas are clearly damaging to the US"
Please tell Obama and the American administration ,because strangely enough they didn't seem to mind any of that when they strongly advised the UK to stay within Europe. Can we spell hypocrisy?

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Anonymous
admin
September 25, 2016 at 10:04 AM ×

Weekend News:

Merkel Rules Out Bailout For Deutsche Bank: Depositor Bail-In Coming Up...

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Nico G
admin
September 25, 2016 at 12:28 PM ×

more on Japanese demographics

44% of the 18-35 year old tranche declared to be virgin

they should all get internship in Africa

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theta
admin
September 25, 2016 at 2:31 PM ×

Lower interest rates justify higher ratio of education cost relative to earnings, as the debt servicing becomes easier.
On the other hand, real interest rates are not lower, only nominal, so that may be a problem if deflation takes hold.

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Anonymous
admin
September 25, 2016 at 10:02 PM ×

@ Siesta

I've a place in the UK you could use to get the kids into uni

We could come to an arrangement

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Gus
admin
September 26, 2016 at 1:54 AM ×

Chinese housing market frenzy: shocking scene at the opening of a new real estate in Hangzhou ...

http://en.people.cn/n3/2016/0926/c90000-9119558.html

"Surveillance camera caught the shocking moment a new real estate development in east China's Hangzhou city opened for sale on September 24. The spree was prompted by new restrictions on Monday which prevent people born outside Hangzhou from buying more than one property. The said real estate was sold out in a mere couple of hours, according to reports from local media. Hangzhou is the latest in a series of Chinese cities to introduce property curbs in a bid to deter speculators and cool the market, which has reported rapid price increases in recent months."

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Anonymous
admin
September 26, 2016 at 7:40 AM ×

The Chinese are all retarded. I'm making popcorn, ready to sit back, watch and enjoy when their entire country implodes. Can't wait.

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checkmate
admin
September 26, 2016 at 8:19 AM ×

"The Chinese are all retarded."
Really"
Intuitively they appear to be the most numerate race on the planet and if that is insufficient to question the statement then they also appear to be strategically advanced. That is not to say they do not carry the same psychological 'blindspot's' common to the species, they do. In summary though I think they play the long game very well.

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northshore
admin
September 26, 2016 at 10:53 AM ×

UK ~£50k student loans interest rates:

While studying: RPI + 3% (3.9% for 15/16, 4.6% for 16/17).
Afterwards: RPI where earning < £21k, on sliding scale up to RPI + 3% where earning > £41k.

But the financialisation of kids' education is ok because the debt's written off after 30 years... Meanwhile 30y gilts are @ 1.4%.

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