Debt to Income Ratios

As we all know lenders love to see low debt to income ratios. It helps them to determine the likelihood that the debt will be paid off.

In a recent Bloomberg article by Sarah Grant posted on Yahoo Finance certain college majors have lower income to debt ratios for undergrad degrees (please note that the group making the calculations did not factor in certain cost of living realities)(1).

Sounds great assuming that one is able to get into those programs, but that aside below is a chart from the article showing the various majors and DTIs.

From (1) The College Majors That Won’t Leave You Drowning in Debt. Bloomberg.

Obviously medicine tops the list as the lowest with what looks like less than 15%, whereas those going into Psychology have the worst at nearly 40% with Education a close second (1).

Here is the rub will all this talk about DTI—Bankers giving out housing loans use the same criteria to determine if an individual(s) can repay a housing loan. Typically they are looking for rates less than 36% (2).

So here you are just graduated with the Bank of ED loans, and let us say you marry that sweet heart you met in College (who also has Bank of ED loans). Now combined your DTI is somewhere around 30% let us say with both Bank of ED loans. So now you plan to leave the rat-hole of an apartment to get a used condo. This would mean you have combined DTI difference of about 6% to get something. Okay that is not enough to get anything really except maybe a cardboard box in an alley (unless your incomes are like that of Donald Trump and then that 6% is something significant).

And people wonder why the Millennials are not buying houses as fast as they should be… maybe the problem is the DTI is too high as soon as they walk out of college? Of course in order to lower this reality a few things will need to occur- 1. Those with College Education Loans need to automatically earn the highest wages possible (as if they had been working at a place for the last 30 years), 2. College Debt needs to be forgiven in masse, and/or 3. Prices of Houses need to drop significantly more.

Okay I think #1 is nearly impossible without some major shift in either the minimum wage to be based on educational attainment or social understanding of what college education is worth.

#2 is possible legislatively for Bank of ED loans under certain leadership assuming said leadership is willing to take the budget hit for writing off that much owed debt. Of course it could cause greater potential for credit default by the U.S. Treasury lowering the overall credit rating of T Notes to possible near junk without some serious raising of tax revenues or serious cut backs on spending.

 #3 could happen as the Baby Boomer age and are moved into some form of assisted living creating a major oversupply of available housing. This assumes that many are not taking out Reverse Mortgages which require them to live in place until they die. It also means that Millennials will have to settle for some seriously used homes from their parents which may require them to borrow even more so to just fix up the place.

At any rate, college debt clearly has skewed the economy of things in the U.S. probably for a long time.

Citations

(1) Grant, Sarah (Jan. 27, 2016). The College Majors That Won’t Leave You Drowning in Debt. Bloomberg. Retrieved From http://finance.yahoo.com/news/college-majors-wont-leave-drowning-181421870.html?soc_src=copy

(2) Bankrate (2016). Debt-to-income ratio calculator. Retrieved from http://www.bankrate.com/calculators/mortgages/ratio-debt-calculator.aspx

Over Price Education, Getting a Job and Wages

On December 21^st, Yahoo Finance had an article from Business Insider by Abby Jackson where a 35-year-old was suing his law school for his inability to get a job (1). The legal notion is that the school falsely advertised the resultants of what a college education will provide in income. In short its advertising created the illusion that he would get a great job earning a bunch of money upon graduation. Okay the article goes on to say he couldn’t pass the bar exam. A legal degree without passing the bar is sort of useless which makes one really question not the degree but the process of getting into the law field overall. Sort of begs the question, why even have a degree when the key thing is just passing the bar exam?

Meanwhile, back in 2011 a paper was published by Fastweb.com and FinAid.org that talked about the need for greater consumer protections where Private Education Loans are concerned through the new powers granted to the Consumer Financial Protection Bureau under Dodd-Frank (2). The paper suggests a series of to do lists most of which deal with providing loan education to students and families, but also the notion of restoring bankruptcy protections for borrowers of private loans (a really good idea and something that would probably help our law student) (2).

Okay the ideas in the 2011 paper are great, but this doesn’t help those who have went to the Bank of Ed (i.e. education loans provided by the Federal Government). These loans are basically what the Street would call junk bonds or penny stocks. They have no collateral under writing them and there is nothing ensuring that they can be paid except the premise that people with college education get more money.

While I do not disagree with the statistical fact that higher education has historically provided greater income then lower amounts of education these facts are based on observations mostly of the 20^th Century where the bulk of our populace shifted from lower amounts of education to higher amounts as society and technology shifted to the modern era. In my opinion most of what accounts for the higher incomes is the social wage construct that the work associated with higher education should earn more.

When we started the 20^th Century society we pretty much had a three tiered system of wages. The base wage which pretty much everyone got, the middle wage for managers and the like, and the top wage which was given to owners of businesses and socially elite. But once the minimum wage was legally created this created a new fourth and bottom tier. Since that point educational attainment has been imprinted greater on to these four tiers. The minimum wage tier is for the non-educated which has shifted to include now high school diploma holding individuals, the next tier is for bachelor degree holding people, the next tier is for masters and doctoral degree individuals, the highest tier is reserved pretty much for the socially elite or 1% as they have come to be known.

With our law student, he complains about being in the minimum wage tier and inability to support his college loans, which is a big duh since in the social construct of wage distribution he should be at least in the next tier up but he isn’t. Here we have the inherent problem of socially constructed wage distributions -- they are not guaranteed except for the lowest tier currently. There is nothing in the law to automatically provide for support of college loans based on educational attainment.

Currently there is a great focus and talk about raising the minimum wage, and no doubt some of it would be coming from those 20 and 30 somethings saddled with college debt and no way out. A lot of the talk these days is focused on how raising the minimum wage will kill jobs (3). While I do not doubt that on a micro-economic level raising the minimum wage will impact certain localities and particular businesses, overall all in the macro-economic sense this impact doesn’t seem to be as big. Below is chart I created from ALFRED showing two major industries typically where minimum wage work is found and the change in the Federal Minimum wage over the last 75 years or so (4-6).

What you will really note is the fact most declines in employment with these two industries appears to be more related to the up and downs of business cycles than increases in the minimum wage. If the Federal Minimum Wage was linked to a COLA adjustment then we might see a greater macro influence on these employment numbers, but it seems to me the raise in the minimum wage is more impacted by political pressure during tougher times economically. In fact, during periods of business expansion one tends to see the cost of goods and services rise since usually during these expansion periods inflation can occur eroding the value of income. This could explain some of the political pressure during certain periods of time. There also appears to be politically the idea of raising the minimum wage during declining business cycles will somehow improve the economy overall (note the changes during recession periods marked in grey). Although I think this is more politicians catering to a voting public than actual economic policy.

My point is we may be forced to raise the minimum wage politically to ensure the Federal Government is not saddled with a large amount of unpaid student debt. The minimum wage is the only tool the Federal Government has to ensure there is enough income to pay these loans off when the labor pool for higher education work is over crowded with too much supply. This is what one gets for years of promoting higher education will lead to economic prosperity, not unlike that early 20^th Century idea that owning a home will do the same thing and look where that got us in 2008.

Citations

(1) Jackson, Abby. (Dec. 21, 2015). A guy with $170,000 in student loans who can’t find a job in the legal profession is suing his law school and working full time for Uber. By Business Insider published on YahooFinance. Retrieved from http://finance.yahoo.com/news/guy-170-000-law-school-204811509.html?soc_src=copy

(2) Kantrowitz, Mark. (2011). Education Lending Suggestions for the Consumer Financial Protection Bureau (CFPB). Published by Fastweb.com and FinAid.Org.

(3) Soergel, Andrew. (Dec. 22, 2015). Fight for $15 Not All It’s Cracked Up to Be- Research suggests a higher minimum wage could increase costs for consumers and weigh on job growth. U.S. News & World Report. Retrieved from http://www.usnews.com/news/articles/2015-12-22/minimum-wage-increase-comes-with-cadre-of-potential-complications

(4) US. Bureau of Labor Statistics, All Employees: Service-Providing Industries [SRVPRD], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/SRVPRD/, December 24, 2015.

(5) US. Bureau of Labor Statistics, All Employees: Retail Trade [USTRADE], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/USTRADE/, December 24, 2015.

(6) US. Department of Labor, Federal Minimum Hourly Wage for Nonfarm Workers for the United States [FEDMINNFRWG], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/FEDMINNFRWG/, December 24, 2015.

Ashley Fleming’s Story

Okay below is a link to video of 24-year-old (Ashley Fleming) up to her eyeballs in debt (1). It is a pretty sad story if you think about it, and no doubt also one that is more than likely common with those of her generation.

https://screen.yahoo.com/100k-debt-1-semester-left-193814146.html

What is sadder I think is the in the December 18^th Yahoo article by Vanessa Sanchez, “financial aid expert Mark Kantrowitz” said “if your total student debt is going to be more than your income once you graduate, you should probably look into another school.” (1).

How do you even know what your income will be once you graduate? Okay you might have a rough idea, but it is not like the college is going to guarantee the degree will automatically yield enough to pay for the loan. Let us take Ashley’s situation…she is attending a college with a $43,000 a year tuition.

Okay let us assume for a moment the following-

1. Ashley doesn’t’ start paying the loan until she graduates.

2. She actually just went four years straight (unlike the actual story).

3. The current loan rate is 4.29%.

4. The term of the loan is 10 years.

5. The present value of all debt owed is $172,000 (4 years at $43,000 a year).

This would mean for each of the ten years her annual payment is $21,513.29. Let us assume for a moment that the debt to income ratio should be similar to that of a mortgage which most say is around 28% to 36% (2).

This would mean right of the gate Ashley would need to be earning an annual income of $59.7K to $76.8K.

Could be possible but it is not guaranteed in our U.S. society. In fact, the only legally guaranteed wage is that of the minimum wage.

All the talk we hear of college graduates making $X more dollars than non-college graduates is primarily the resultant of a social construct from the 20^th Century. During the 20^th Century our U.S. population shifted in educational attainment from basically grade school to high school to then college. In doing so the accepted social construct of higher wages for greater educational attainment pretty much stayed the same (i.e. grade school got you X, high school got you X+1, college got you X+2). But now with pretty much everyone going to college we have leveled the workforce to a common reality which in time will cause everyone’s wages to be basically the same (standard supply/demand economics) if not fall to the lowest common denominator (i.e. minimum wage).

The solution proposed to this economic reality will no doubt be just adding more education to the equation. If people, simply keep getting higher and higher degrees (i.e. more education) we can keep the income growth curve from collapsing. Although how higher can one go than Post-Doc degrees?
And exactly how much debt will all this cost our economy? And exactly how much sales would be required for a business to support all these highly educated Americans? Wow I hope the Chinese are willing to pay a lot for our highly educated workforce.

Now don’t get me wrong. Education is a good thing, but when tied to certain economic realities such as income and debt there becomes a distortion where the haves and haves not become increasingly obvious (as with Ashley’s story).


Citations

(1) Sanchez, Vanessa. Dec. 18, 2015. $100K in debt, 1 semester left and no cosigner in sight. Yahoo Finance. Retrieved from http://finance.yahoo.com/news/-100k-in-debt--1-semester-left-and-no-cosigner-in-sight-190859531.html?soc_src=copy

(2) da Costa, Polyana. (2011) Why debt to income matters in mortgages. Bankrate. Retrieved from http://www.bankrate.com/finance/mortgages/why-debt-to-income-matters-in-mortgages-1.aspx

Occupational Handbook

The BLS is just released its updated version of the Occupational Handbook. I will admit that this is by far one of the best tools out there concerning defining occupations and can be a great help to those trying figure out what they need to obtain certain kinds of work.

But I have a real problem with the post “How People Use the Occupational Outlook Handbook to Search for Careers” by the BLS Commissioner (2).

This post suggests that 1. Not all young students should use it for college planning, and 2. It is better to use this tool so as to avoid changing majors (and increasing your loan costs) while in college (2).

Here is my rub with this posting—the idea of career. The word career comes from a root that means course or path (1). The word presumes that one’s work has a beginning and an end point. The truth is in today’s economy people change employers so frequently that a career has become a twisted path with dead ends and side tracks (not unlike switching majors while in college).

Yes, people should use the Occupational Handbook for planning purposes, but I think in today’s economy one needs to have more than one degree in their pocket (or at least plan to get second degree later in life). The goal here is to try to avoid adding more debt to the equation. This means you will need to plan to work and pay for education as you go.

A person today needs to be a basic jack-of-all-trades when it comes to education.

Citations

(1) Harper, Douglas. (2014). Online Etymology Dictionary. Retrieved from http://etymonline.com/index.php?allowed_in_frame=0&search=career.

(2) BLS Commissioner. (2015). How People Use the Occupational Outlook Handbook to Search for Careers. Blog. Retrieved from http://beta.bls.gov/labs/blogs/2015/12/17/how-people-use-the-occupational-outlook-handbook-to-search-for-careers/.

Comments on the BLS release of Jobs from 2014-2024

Take some time to watch this video from the BLS about the near term future of jobs in the US (1).

You will notice in the video that most appear to be jobs that are medically related. Which makes some sense when you think of the fact that the Boomers are aging and with age comes medical needs. But also there are Wind Turbine Technicians. Really Wind Turbines are going to become a big industry with oil being so cheap now? I guess the BLS knows something we do not know.

So here is the dilemma…

You are just getting out of high school, and are planning to go to college but what should you study? Obviously something in the health field right now because for the next twenty years it will have the most jobs and pay the most on average.

But medical school is not cheap. So you will borrow to get the education, but what happens if everyone else is thinking the same? What will happen if a whole generation of students go for the same career only to find themselves not employed due to an overcrowded market.

Right now oil is down because of an economic principle of supply and demand, and this same principal applies to labor as well (both physically in total numbers but also micro-wise in specific fields). So as the supply of graduating students increases in a specific job field, in theory the entry wages of that job field should decline due to oversupply. Going forward since the entry wages are depressed, the future wages will also become depressed since wages tend to increase as a percentage of past wages. Long term resultant is an increase possibility of lower incomes for those who now are up to their eyeballs in educational debt.

Now I am not saying this observation is absolutely true or not, but it seems to me that it does economically make sense.

This is something to ponder as we come closer to the Presidential Election in the U.S. We all should be asking ourselves “What is the plan for dealing with College Debt and ensuring that college graduates can get the income needed to pay that debt off in a timely fashion without jeopardizing the health of the economic overall”.

Citation

(1) BLS (2015). Fastest Growing Occupations 2014-24. YouTube Video. Retrieved from https://youtu.be/LIvxuRb47y4.

Is the recent Presidential Memo a good idea?

President Obama has issued as of 6/9/14 a memo directing the Department of Education to develop regulations concerning to limit the student repayments of loans to a maximum of 10% of the borrower’s income (1).

While on the surface this seems a like a good idea, but right off the bat it seems to me that this is form flat 10% income tax to those who borrower for education from the Bank of Ed. Let us see how the math stacks up.

Using some calculations from a previous posting “Will you make more money with a college degree?” let us assume the loan is capped at 10% of gross income, and is completely forgiven in 20 years (1, 2). I will use the same income and expenses used from my previous post (2).

Total Net Income (20 years, 2013 dollars)
	Less than high school graduate	High school graduate	High school graduate with some college	Associate's degree	Bachelor's degree
10% income College Loan	($53,878.91)	$2,931.01	($9,771.92)	$107,709.59	$294,173.35
w/o College Loan	$2,931.01	$114,601.57	$127,057.65	$285,922.26	$537,625.79
Total Loan Amount Paid over 20 Years	$71,385.51	$111,670.56	$136,829.56	$178,212.68	$243,452.44

Still clearly you will come ahead not taking the loan, but what is interesting is what happens if you end up with a job that makes the median income typically associated with lower educational attainment. 

So this would be you go to college, take out one of these 10% of income loans, and then end up working for a job that requires less than high school education because this all you could get and you get stuck in it for 20 years. Well then you will have really cost yourself more money than had you landed that median Bachelor’s degree job. Bottom line is it appears this loan process will punish those who are unable to obtain that median college income job.

Clearly then it is better to go to a more prestigious university or college, where the debt load will be higher due to more expensive tuition, and hopefully provide you with better opportunity to land that well-paying median job through the extensive alumni network.

Of course what this means politically is that the federal government must now ensure some macroeconomic mechanism that will encourage the growth of these well paying higher educational jobs to keep up with college graduation rates. After all it has a vested interest to do so as the more people who don’t end up with these higher paying jobs will in the increase the costs of national debt since educational loans are nothing but a budget offset.

Hmmm… the idea of a minimum wage based on educational attainment is sounding better and better.

Citations

(1) Office of the President, White House (2014). FACTSHEET: Making Student Loans More Affordable. Retrieved on 6-10-14 from http://www.whitehouse.gov/the-press-office/2014/06/09/factsheet-making-student-loans-more-affordable/

(1) Office of the Press Secretary, White House (2014). Presidential Memorandum -- Federal Student Loan Repayments. Retrieved on 6-10-14 from http://www.whitehouse.gov/the-press-office/2014/06/09/presidential-memorandum-federal-student-loan-repayments

(2) Bureau of Labor Statistics (2014). Consumer Price Index- All Urban Consumers. Series ID: CUSR0000SA0. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first decile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917100. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917200. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(2) Bureau of Labor Statistics (2014). (unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (third quartile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917400. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (ninth decile), Employed full time, Wage and salary workers, High school graduates, no college, 25 years and over. Series ID: LEU0252917500. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first decile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252918900. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over Series ID: LEU0252919000. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). ((unadj)- Median usual weekly earnings (second quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919000. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (first quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over Series ID: LEU0252919100. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (third quartile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919200. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2014). (unadj)- Usual weekly earnings (ninth decile), Employed full time, Wage and salary workers, Bachelor's degree only, 25 years and over. Series ID: LEU0252919300. Databases, Tables & Calculators by Subject. Data. Retrieved on 5-10-14 from http://www.bls.gov/data/  

(2) Bureau of Labor Statistics (2013). Table 2010- Highest education level of any member: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2012. Consumer Expenditure Survey. Combined Expenditure, Share, and Standard Error Tables. Retrieved on 5-10-14 from http://www.bls.gov/cex/csxcombined.htm .

How is student debt a macro-economic tool?

Student debt is an excellent macro-economic tool just as much as housing debt is one as well. This is why it is considered by many as a good debt (1 & 2). Although, housing debt is subject to possible speculation and thus causing greater delta in prices, which is why student debt is more preferred as tool because a college degree is non-transferrable to another person and it really doesn’t appreciate or depreciate in value over time. It simply is a cost which is amortized over the life of loan.

From a macro-economic perspective debt like student loans simple eat up potential consumption and savings of individuals and unlike housing doesn’t create an initial increase in consumption caused by the first produced house, nor a potential asset bubble (2). Further it acts like a government tax since currently this debt is controlled by the Federal Government through the direct loan process of the Bank of Ed, or could be considered a form of transfer payment. So despite the interest reducing individuals’ personal income tax, the actual loan is not currently counted as either a tax or income to the person but inherently acts like such a thing and better than that it counts as a revenue offset to government net expenditures in effect lowering the governments expenditures overall (2 & 3). Any boost to the economy would show up through the expansion of the higher education markets which don’t impact the overall economy too much but would increase some amount of GDP through employment and any investment done by the employees and university/college. It is a great way of expanding the money supply without ever having to increase the national debt or print more cash through the Federal Reserve System and it’s only inflationary to the higher education market vs. the rest of the economy. It is just a perfect macro-economic mechanism.

The big problem with student debt as macro-economic tool is the interest rate which currently is controlled by Congress. But even this element is flexible since if the student debt is causing a problem economically Congress can simply add some debt forgiveness or lower the rate as means to free up cash in the macro-economy. Although I think it would be better if these rates were controlled more by the Federal Reserve than Congress.

Long term though this tool may prove to be difficult to manage because it is inherently dependent (like housing loans) on the future income of the individual which is unpredictable in nature (4). What is somewhat predictable is the number of jobs requiring a college education which the Bureau of Labor Statistics periodically produces (5). The current projections for 2022 show an increase mostly in work not requiring college education which presents an interesting problem with the current growth rate of college graduates (5). At the current growth rates there will be a major short fall by 2022 requiring those graduating at that time to have to wait 21 years for a bachelor degree job slot to be freed up through attrition (5 & 6). Basically there will be so many possible people with a 4 year degree older than them that any potential new slot will take longer to open up since the older generations are more than like not going to retire anytime soon depending upon their debt load, and retirement needs.

This problem of overcrowding the college job market with degreed individuals will continue to cause a crowding out of those jobs requiring less education pushing down the overall income potential of a college graduate bringing into question the whole issue of general value if current job creation trends continue as noted in a previous post concerning student loans and accepting lower income jobs. And no doubt as the crowding out continues there is even greater risk of default, which has been mitigated in part by current laws preventing bankruptcy and allowances of garnishments.

What is worse is the fact that as more students apply for college, and seek more loans for college, this causes a runaway flooding of cash into the higher educational system causing localized market inflation or possible hyperinflation depending upon levels. This flood of cash is only limited by the size of the federal deficit since student loans are budgetary offset for the federal government (3).

So while as an excellent macro tool to control consumption once graduated, the problem is controlling the inflationary effects of the front end in since it would seem to require increased government loaning and thus inflationary pressures on micro market of post-secondary education.

These facts seem to be sort of counter-productive to the original purpose of the Higher Educational Act of 1965 (7). The idea was to allow for a greater number of people to achieve a higher education with the goal of building a better society overall. But it seems to me that with the use of student debt it is building instead a culture of a basic educational tax to obtain that society, with no guarantees of having a secured future. The reason is the job market is not keeping in pace with the production of an educated workforce, and it seems that no one really cares about this fact.

Since a majority of U.S. higher education degrees continue to be in business vs. any other possible field by little over 4 to 1, very clearly we need to increase work opportunities in the business markets overall (8). Or we need to encourage that entrepreneurial spirit of America through increased small business loans to allow all that education to mature (maybe a bit of a debt swap—educational loan folded into a small business loan).

So overall college debt is a great macro-economic tool and is very versatile, provided you don’t mind the fact the future supporting income is unknown and not guaranteed currently, and there is the potential of hyperinflation with the costs of college overall requiring a spiraling need for more cash to flow into the system as more people pile into the system.

Citations 

(1) Supiano, Beckie (2012). What Does $1-Trillion in Student Debt Really Mean? Maybe Not That Much. The Chronicle of Higher Education. Retrieved on 5/27/14 from http://chronicle.com/article/What-Does-1-Trillion-Mean-/131900/

(1)Wolber, Thomas K. (2012). Student-Loan Debt is Real Threat to Economy. Letters to the Editor. The Chronicle of Higher Education. Retrieved on 5/27/14 from http://chronicle.com/article/Student-Loan-Debt-Is-Real/132655

(2) Bureau of Economic Analysis (u.d.). A Guide to NIPAs. PDF. Retrieved on 5/27/14 from http://www.bea.gov/national/pdf/nipaguid.pdf

(3) Bureau of the Fiscal Service (2013). Combined Statement of Receipts, Outlays, and Balances- Current Report. Retrieved on 4/29/14 from http://fms.treas.gov/annualreport/cs2013/sc1.pdf%20on%204/29/14

(3) U.S. Government Accountability Office (u.d.). Capital Assets. Retrieved on 4/29/14 from http://www.gao.gov/fiscal_outlook/measuring_the_federal_deficit/interactive_graphic/capital_assets

(4) Executive Summary (2006). Dealing With Debt: 1992-93 Bachelor's Degree Recipients 10 Years Later, 1. NCES 2006156. Retrieved on 5/27/14 from http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2006156

(5) Bureau of Labor (2013). Employment Projections: 2012-2022 Summary. Retrieved on 5/27/14 from http://www.bls.gov/news.release/ecopro.nr0.htm

(6) United States Census Bureau, Population Division (2012). PEPSYASEXN-Geography-United States: Annual Estimates of the Resident Population by Single Year of Age and Sex for the United States: April 1, 2010 to July 1, 2012. Data. Retrieved on 5/27/14 from http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk

(7) Cervantes, A., Creusere, M., McMillion, R., McQueen, C., Short, M., Steiner, M., & ... Texas Guaranteed Student Loan, C. (2005). Opening the Doors to Higher Education: Perspectives on the Higher Education Act 40 Years Later. TG (Texas Guaranteed Student Loan Corporation).

(8) U.S. Department of Education, National Center for Education Statistics, Higher Education General Information Survey (HEGIS) (2012). "Degrees and Other Formal Awards Conferred" surveys, 1970-71 through 1985-86; Integrated Postsecondary Education Data System (IPEDS), "Completions Survey" (IPEDS-C:91-99); and IPEDS Fall 2000 through Fall 2011, Completions component. Retrieved on 5/27/14 from http://nces.ed.gov/programs/digest/d12/tables/dt12_313.asp

Will College Debt pop like Housing in 2007?

By pop I assume you are talking about a sudden collapse in prices. Well as noted in my previous post, college debt is run by the Bank of Ed right now, and considering the ease at which one can obtain such a loan (usually the simple click of a mouse button) it is pretty clear that it’s a sub-prime market.

As such the Federal Government is engaging in a form of economic stimulation that will do nothing but cause inflation, at least where colleges are concerned. This could in part explain the reason why the prices of college keep going up the way they have in recent times. It is just pure inflation due to the free Federal dollars flowing into the system.

Unlike the housing market, the asset that results from a college loans is intangible in nature. In fact, I am uncertain you could truly assign a market value to a college degree like that of a house because by its nature it is non-transferrable to another person. As such there appears to be no way for the value of college degrees to recreate the conditions like housing where one could end up “under water” with the loan simply due to market trade conditions or to cause Wall Street to collapse unless these loans were repackaged into some sort of security instrument.

But according to Michael Wenisch writing in the Catholic Social Science Review, “With the exception of a handful of extremely wealthy universities, institutions of higher learning are for the most part substantially dependent on student tuitions, and thus also on student loans, in order to operate. Without the continuing growth of the student loan bubble, it is foreseeable that many colleges and universities will be forced to declare bankruptcy and cease operations over the next ten years.” (1)

And according to Andrew Ross writing in the New Labor Forum, the “transfer of fiscal responsibility from the state to the individual … has been steady for more than three decades, but the rate of transfer has quickened in recent years, driving up tuition costs in all sectors (they have risen by 500 percent since 1985), but in state universities in particular. Last year, overall state funding was cut by 7.6 percent, the largest decline in more than half a century.”(2)

So it is clear that without the student loans the higher education market could not maintain itself at its current pace, as such there are some who have looked at this market and believe that it could collapse simply by two things-

1. The sudden withdrawal of Federal funding of the loans.

2. The sudden withdrawal of students obtaining loans or attending college.

Either of these two conditions would cause the college market environment to experience a sudden contraction event, but unlike the housing boom this contraction event will not be so wide spread in economic effect. The flow of cash into the college market is simply too isolated from the rest of the economy to impact such things as Wall Street. As such a sudden collapse would only at best cause a smaller labor pool of college graduates doing nothing more than raising the wages for college level work which in effect would again attract more people back to college.

Personally I don’t think the 1st event is even possible because the Federal funding of college loans is a budget deficit offset (as in it is a negative budget element), so Congress really doesn’t have an incentive to stop the loaning while other spending continues. In fact, college loaning makes a great tool to balance the budget, or at least get closer to that goal. At least it is helping the States supporting colleges to make cut backs allowing them to balance their budgets based on Ross’ observations (2).

What is more likely to occur than either of the two conditions above is greater amounts of default on college loans which does nothing but raise the budget deficit. This point was noted in the Economy online section of BloombergBusinessweek by Caroline Salas Gage and Janet Lorin article entitled Student Loans, the Next Big Threat to the U.S. Economy? , in which they reported that in the 3rd Quarter of 2013 “student loans outstanding more than 90 days shot up 11.8 percent” (3). Further the New York, Kansas City, St. Louis and San Francisco Federal Reserve Banks (FRB) have been monitoring this situation as well (4).

Although recently the Board of Governors of the Federal Reserve System noted in a Feb. 19, 2014 posting of the FEDS Notes that there was a recent “deceleration in student loan debt” mostly attributed to “a flattening out in the volume of student loan originations and college enrollment, along with increasing repayment rates on existing loans”, but they did note “we also anticipate sizable originations of student loans in coming years, reflecting persistently elevated levels of college enrollment and further rises in the costs of higher education.”(5)

Even so since the Bank of Ed is basically running a sub-prime market which is in reality dependent upon wages to pay them back (just like the mortgage sub-prime market), if there is a collapse in college level work wages then there is a greater risk of default. This is the way that college loans can become “underwater” through the inability to obtain work paying enough wages to support the loan. This issue is basically a structural problem with labor market and job creation versus any cyclical nature that might be occurring.

The only way to prevent this collapse is to socially build into the system some form of guaranteed wages. Currently the only guaranteed wage is minimum wage, so obviously this needs to be raised to higher levels to support the current debt load, or at least re-created so as to guarantee wage amounts for college degreed individuals.

The only other idea is to allow re-financing of the loans to longer terms and thus lowering the impacts of the loans and ensure a lower default risk. This is what some U.S. Senators want to do currently base on a Yahoo Finance news report where they want to allow student loans to be refinanced to 3.86% (6).

In the end I don’t think the college debt load will pop like the housing deals, but I do think the amount of debt can cause problems for the Federal deficit should the conditions which are supporting the loaning suddenly change which in turn could cause greater national debt to occur causing less government spending, higher taxes, the potential raising of the minimum wage, and/or the encouragement of greater student debt for college with refinance options to deal with the situation.

Citations

(1) Wenisch, M. (2012). The Student Loan Crisis and the Future of Higher Education. Catholic Social Science Review, 17345-350.

(2) Ross, A. (2013). Mortgaging the Future: Student Debt in the Age of Austerity. New Labor Forum (Sage Publications Inc.), 22(1), 23-28. doi:10.1177/1095796012471638

(3) Gage, C. S. & Lorin, J. (2014) Student Loans, the Next Big Threat to the U.S. Economy? BloombergBusinessweek, Economy online section. Retrieved on 5/12/2014 from http://www.businessweek.com/articles/2014-01-16/student-loans-the-next-big-threat-to-the-u-dot-s-dot-economy .

(4) Choi, Laura (2011). Student Debt and Default in the 12th District. Federal Reserve Bank of San Francisco, Community Development Research Brief. Retrieved on 5/12/14 from http://www.frbsf.org/community-development/files/student-debt-default-bay-area.pdf .

(4) Dai, Emily (2013). Student Loan Delinquencies Surge. Federal Reserve Bank of St. Louis, Inside the Vault, Spring 2013. Retrieved on 5/12/2014 from https://www.stlouisfed.org/publications/itv/articles/?id=2348 .

(4) Edmiston, K. D., Brooks, L., and Shelpelwich, S. (2012). Student Loans: Overview and Issues (Update). Revised 2013. Federal Reserve Bank of Kansas City, Research Working Papers. Retrieved on 5/12/14 from https://www.kansascityfed.org/publicat/reswkpap/pdf/rwp%2012-05.pdf .

(4) Federal Reserve Bank of New York (2013). Student Debt by Age Group. Retrieved on 5/12/14 from http://www.newyorkfed.org/studentloandebt/ .

(5) Hannon, S. and Mezza, A. (2014). A Few Thoughts on Recent Deceleration of Student Loan Debt. Board of Governors of the Federal Reserve System, FEDS Notes. Retrieved on 5/12/14 from http://www.federalreserve.gov/econresdata/notes/feds-notes/2014/a-few-thoughts-on-the-recent-deceleration-of-student-loan-debt-20140219.html .

(6) DiGangi, C. (2014). The New Proposal to Cut Student Loan Payments. Yahoo Finance: credit.com. Retrieved on 5/12/14 from http://finance.yahoo.com/news/proposal-cut-student-loan-payments-123055504.html .

Is College Debt bad for the Economy?

Well according to the New York Federal Reserve Bank student loan debt amounted to a mere $966 Billion by the end of the fourth quarter of 2012 (1). This would represent about 6.22% of the real GDP for the 4^th Quarter of 2012 in comparison to the 67.23% of personal consumption and 18.91% of government consumption and investment (2).

Further the St. Louis Federal Reserve Bank did comment that student loans do appear to be impacting the economy in the short term, but refused to comment on the long term stating “However, this topic is complex and more research is needed before suggesting policy prescriptions.” (3)

Logically it would seem that having student debt would lower the amount of available income during the time of the loan thus decreasing abilities to both purchase items and save. But this all depends upon the ratio of the income to debt being paid. The worse this ratio is the worse the problem will be for the economy.

If anything student loan debt simply slows down the economy by sucking away potential consumption spending or savings.

The same could be said of housing to a lesser extent but only for existing housing vs. new housing. Economically the constant reselling of existing housing and the associated loans do nothing more than eat up potential income for a time and thus personal consumption and savings.

Both housing and student loans could be seen as excellent tools for dealing with inflation since if there is greater interest charged this could dampen any potential inflation caused by larger amounts of currency present. All one needs to do is simply make occasional adjustments to these key rates and viola you can make macro-adjustments as needed to the currency supply.

So in the end student loans are not really that bad for the economy since they now provide the Federal Government an excellent policy tool to deal with the economy (especially since the Bank of Ed opened its doors back in 2010), morally though I think one can make a strong argument that this is not a good idea linking higher education to such a debt mechanism.

Unlike a house, higher education debt is permanent in nature (you can only get out of it through death) and does not have a product that can be resold to at least recover from some of the debt (housing loans get you a house—higher education gets you a piece of paper with your name on it saying you completed a bunch of courses).

If given a choice between housing debt and college debt, I would take the housing debt because it offers better terms in general despite the potential economic bubble problems of the late 1990s.

Citations

(1) Federal Reserve Bank of New York (2013). Student Debt by Age Group. Retrieved on 5/12/14 from http://www.newyorkfed.org/studentloandebt/ .

(2) Federal Reserve Bank of St. Louis (2014). Economic Research. Data. Retrieved on 5/12/14 from http://research.stlouisfed.org/fred2/ .

(3) Elliott, William and Nam, Ilsung (2013). Is Student Debt Jeopardizing the Short-Term Financial Health of U.S. Households? Federal Reserve Bank of St. Louis Review. Sept/October 2013, Vol. 95, No. 5, pp 405-424. Retrieved on 5/12/14 from http://research.stlouisfed.org/publications/review/article/9963 .