Westpac has released an interesting report (below) examining the rapid growth of student loans in the United States and their potential impact on the spending power of younger workers / home buyers, which Westpac claims is a “source of considerable concern”:
Lower labour force participation has translated directly into higher participation in post-secondary education, and a consonant rise in the demand for student debt. In round figures, from 2005 to today, in the under-30 bracket, the stock of loans has increased 2¼ fold, with the number of borrowers increasing by around two fifths, and the average loan size increasing by roughly two thirds, implying a combination of cost escalation (fee inflation), slower amortization and longer study duration.
…this increase in student debt has been directly funded by the Federal Government.
The decline in labour market participation and rise in student debt clearly highlights that, faced with an adverse economic environment and a dearth of attractive job opportunities, young professionals have sought further education as a way to improve their long-term job prospects. In a well functioning labour market, developing skills and knowledge would be well rewarded without undue delay. But in the current environment where quality, full-time jobs remain scarce, this cannot be the case for all, or
perhaps not even the majority.
From the payrolls survey, we see that around 30% of the jobs created over the past 18 months have been in the leisure, hospitality and retail space; in the past six months, this share has been higher still at 37%. The other key sector for job creation over the past 18 months has been professional and business services, a broad sector that includes skilled and unskilled positions. Over the past 18 months, 27% of the total new payrolls jobs created have occurred in this sector. The concern is that roughly one third of these positions have been temporary jobs which come neither with the security nor the benefits of permanent employment…
The share of total job openings [projected] in 2020 deemed suitable only for degree qualified individuals is expected to be little changed from their 2010 employment share, suggesting that the BLS is not expecting a tilt in the composition of openings towards more higher education (and income) positions (and are implying few ‘exits’ to create movement). Yet we have an enlarged cohort of indebted 20 and early-30 somethings looking for such openings. The consequence of mundane labour market outcomes has
been a substantial rise in student loan delinquencies as recent graduates struggle to attain the income needed to service their loan(s). On the NY Fed’s data, the proportion of loans 90 days past due has risen from 6% mid decade to closer to 12% of late…
The NY Fed estimates that, as at Q4 2012, some 44% of borrowers were not yet obligated to make repayments. The consequence of this is that if we do not see a marked
improvement in the employment prospects for younger cohorts, we will see a substantial rise in student loan delinquency rates down the road. From an ABS point of view, the 2009-12 vintages do not look appealing, to say the least…
Given that these loans are typically small in scale (an average of around $25k), many would argue that they don’t matter for the overall health of the US economy. But this benign view needs to be discounted on a number of levels.
First, the interest rate charged on student loans is typically well above the 30-year mortgage rate: at least 6.8% versus the current 30-year mortgage rate of 4.3%… A back of the envelope calculation shows that a 6.8%, 10-year, fully-amortizing $25k student loan would require monthly repayments of $288. That equates to roughly 9% of the average after tax monthly income of a 25-34 year old graduate.
Although that appears serviceable for those who find the employment for which they are trained, it is a major drag on the disposable income of the individual, and is a material barrier to accruing the savings required to enter the housing market. By way of scale, for the individual with the ‘representative’ $25k student loan, the servicing estimate above would be 1½ times as large as either food or transport as a share of total household disposable income.
Secondly, a related concern is that there is no real minimum level of income below which student loan payments are deferred…
Each of the above concerns pale in comparison to the inability of borrowers to extinguish student loan liabilities if their income proves insufficient to pay down the debt, and all avenues of forebearance have been exhausted. That is, the indivual declares bankruptcy. In such an instance, the individual remains liable for the debt as long as it is deemed that they have a chance to pay it back in the future. In the interim, the credit standing of the individual/household deteriorates, while their total debt continues to grow in line with accrued interest.
At best, these obligations limit the amount a young household can borrow; at worst, they destroy their credit standing…
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
