“Delinquency Is At Crisis Levels” – Student Loan Bubble Is About To Pop

Over the last decade, the federal student loan segment experienced an explosion in growth.

As the cost of college soars, the result is a widening default crisis that even Fed Chairman Jerome Powell recently warned: Burgeoning levels of student loan debt could slow down economic growth over time. 

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Millennials have frantically tapped into student loans, up almost 157% in cumulative growth over the decade. By comparison, Bloomberg notes that auto debt has grown by 52% while mortgage and credit card debt fell by 1%. Student Loans Owned and Securitized, Outstanding has breached the $1.5 trillion level under the Trump administration, making it the second largest household debt segment among all Americans, after mortgages. 

Analysts warn that a perfect storm in the student loan bubble is brewing. They say student loans are being issued at unprecedented rates as millennials are conditioned to believe that higher education is the only way to get ahead. This comes at a time when tuition at both private and public institutions is at record levels, and interest rates on loans are surging to fresh cycle highs.

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As the storm clouds gather, the next generation of graduates could default on their loans at even higher rates than today, which would ultimately form a turning point in the bubble and usher in a winter cycle. 

“Students aren’t only facing increasing costs of college tuition; they’re facing increasing costs of borrowing to afford that degree,” said John Hupalo, founder and chief executive of Invite Education. “That double whammy doesn’t bode well for students paying off loans.” 

Bloomberg Global data analysis of federal loans shows student debt has the highest 90+ day delinquency rate of all household debt.

Americans who attended for-profit universities and community colleges make up 70% of all defaults, said Judith Scott-Clayton, a Columbia University associate professor of economics. She said that poor working class folk were suckered into worthless degrees, with the promise of a better job, but it only left them with high debt loads.

Scott-Clayton notes that delinquencies skyrocketed in 2011 to 2012 academic year, reaching almost 12%. This year, the rate remains near cycle highs, which she attributes to social and institutional factors rather than average debt levels. “Delinquency is at crisis levels for borrowers, particular for borrowers of color, borrowers who have gone to a for-profit and borrowers who didn’t ultimately obtain a degree.”

Hupalo said: “There’s a systemic problem in the student loan market that doesn’t exist in the other asset classes…Students need to get a job that allows them to pay off their debt. The delinquency rate will rise as long as students aren’t graduating with degrees that pay back that cost.” Those most at risk of delinquency tend to be, college dropouts and for-profit graduates, who struggle to find good jobs that allow them to pay off their balance.

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To make matters worse, the Federal Reserve continues to reduce its balance sheet, known as quantitative tightening, along with hiking the federal funds rate, now at 2.25%, which has forced borrowing costs higher in the last several years.

Undergraduates have seen interest on direct subsidized, and unsubsidized loans breach 5% in 2018 — this is the highest rate in almost a decade, according to the US Department of Education.

“If you’re in an interest-based plan, you can see costs go up, which worries me for students who are in school and have seen debt go up before they’ve even finished,” Scott-Clayton said.

In the next economic downturn, which could be late 2019 or sometime in 2020, the student debt bubble could experience a surge in delinquencies.

Earlier this year, Powell warned Congress of the bubble risks:

“You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life,” Powell testified before the Senate Banking Committee in March. “As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth.”

2018 has been a rough year for millennials, as they struggle to pay back their debt obligations. Student debt has prevented some from having children, owning a home, or even believing in the American dream. 16% of millennials age 25 to 35 lived with their parents in 2017, up 4% from a decade prior, according to Bloomberg Intelligence.

“You have a whole generation of people that have a significant amount of student loans and its crimping demand for other goods and services,” said Ira Jersey, the chief US interest rate strategist for Bloomberg Intelligence. “As people live with their parents or cohabit with a non-partner, millions of houses and apartments aren’t being purchased. Neither is WiFi or that extra sofa. We think this is having a significant impact on the economy.”

While Wall Street and the Trump administration tout news of a roaring economy and low unemployment, the risks of the student loan bubble imploding in the next economic downturn could start in the second half of 2019.

A real economic barometer of millennials’ financial health is to monitor the student loan delinquency rate, which, as of today, shows it is near cycle highs. A sign that storm clouds are gathering. 

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Heavily indebted millennials might have a shot at paying off their student debt via a new game show on TruTV called “Paid Off.” Contestants must have lots of student loans and could have the chance to answer trivia questions – and if they win, the game show will pay off their student debt.