U.S. Student Loan Debt Matches U.S. Junk Bond Market, Prevents Homeownership

U.S. Student Loan Debt
iStock/Darren415

U.S. student loan debt has skyrocketed to $1.3 billion, equaling the U.S. junk bond market.

U.S. student loan debt is one of the riskier types of debt, with higher levels of delinquency. Beyond that, the massive amounts of debt that the country’s college grads accrue by the end of their studies is preventing them from homeownership and other activities typically associated with the American middle-class. Housing prices spiking almost universally across the country is not making their paths to ownership any easier either.

“Delinquency rates on student loans are much higher than those on auto loans or mortgages, due to loose student loan underwriting standards, the unsecured nature of student debt, and the inability to charge off non-performing student loans in bankruptcy,” Goldman Sachs Group Inc (NYSE:GS) analysts Marty Young and Lotfi Karoui wrote in a note Tuesday. “The substantial majority of student loan default risk is borne by the U.S. Treasury.”

The note went on to say that house ownership rates would be hurt by the ballooning debt.

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Of the debt, about $190.0 billion is backed by assets. Of that number, $150.0 billion is connected to loans where the U.S. government guarantees the repayment of the principal.

“Most of the remaining student loan debt not in ABS format is provided to students by the U.S. government through its Federal Direct lending program,” wrote Young and Karoui.

About 10% of borrowers are at least 90 days behind on their student loan payments, the note said, versus about 1.2% for mortgages, meaning that in the U.S., it’s easier to make your housing payments than it is to get an education.

The average amount of debt for a student in the U.S. is $17,126. With that much owed following the completion of their studies, new graduates are finding it harder than ever to get their life started after school.

The U.S. government, for its part, is not helping the situation.

Reps. Virginia Foxx, R-N.C., and Brett Guthrie, R-Ky., of the House Committee on Education and the Workforce, introduced the bill “Promoting Real Opportunity, Success, and Prosperity through Education Reform Act,” otherwise known as PROSPER.

The bill seeks to accomplish a number of goals, but several would heavily impact students and U.S. student loan debt.

The Public Service Loan Forgiveness program, which forgives student loans for borrowers who find work in a nonprofit or in a state, local, or federal government job and who also complete 120 qualifying monthly payments over a 10 year period, would be shut down under the bill. Since 2007, more than half a million people have qualified for the program.

Another aspect of the bill includes putting a cap on loans for graduates students, weakening the federal loan system overall. The result will be less competition for private lenders, allowing them to raise prices and interest rates due to the federal government retreating from the market, according to some critics of the bill.

To make matters worse, one of the best-performing investments in the government’s portfolio is student loans. This would mean that not only will U.S. student loan debt potentially increase, but government revenue may take a hit as well.

Debbie Cochrane, vice president of the Institute for College Access Success, was one of the major critics of the bill and said in a statement that the bill would “start charging millions of low- and middle-income students interest on all of their loans while they’re still in school, adding thousands of dollars to students’ loan balances.”

 

Sources

Student Loan Debt Is Now As Big as the U.S. Junk Market,” Bloomberg, December 5, 2017.

Student Loan Debt: the Bubble Goldman Thinks You Should Buy,” The Wall Street Journal, December 5, 2017.

How much student loan debt people owe in each state shows some graduates are getting screwed,” Business Insider, November 17, 2017.

House Republicans Want to End Student Loan Forgiveness for Public Interest Jobs,” The Intercept, December 4, 2017.

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