Sunday, September 11, 2016

Soaring Student Loan Debt and Tuition Costs are Hindering U.S. Economy

I’ve long argued that debt is holding up consumer spending, which in turn is holding back the US economy.

Many households have four types of debt: credit card debt, mortgages, auto loans and student loans.

For those with all four, the combined average is $263,259. That translates into an average of $6,658 a year in interest payments alone.

According to the U.S. Census Bureau, the median household income for the United States was $53,657 in 2014, the latest data available.

That means these households are spending 12% of their gross income on interest payments alone.

Though household debt fell after the Great Recession, it is once again on the rise.

According to the New York Fed:

Aggregate household debt balances increased in the first quarter of 2016. As of March 31, 2016, total household indebtedness was $12.25 trillion, a $136 billion (1.1%) increase from the fourth quarter of 2015. Overall household debt remains 3.3% below its 2008Q3 peak of $12.68 trillion.

In other words, household debt is now just $43 billion below its all-time high, set eight years ago.

Among the above four types of consumer debt, mortgage debt, at $8.37 trillion, is by far the biggest. This makes sense; everyone needs a place to live and mortgage payments can be fixed so that inflation makes them relatively smaller through the life of the loan. Additionally, a homeowner can eventually pay off a mortgage and live “rent” free.

Moreover, homes generally increase in value over time, allowing owners to gain some profit if they hold their homes long enough, maintenance and repairs notwithstanding.

The price of new homes increased by 5.4% annually from 1963 to 2008, on average, according the Census Bureau. That period includes the enormous price bubble of the last decade.

However, taking a longer view, the average annual home price increase in the U.S. from 1900 - 2012 was only 3.1% annually. So, the bubble years were truly an anomaly.

The two fastest growing segments of debt are auto and student loans, which have climbed to $1.1 trillion and $1.4 trillion respectively -- both record highs.

Debt payments leave consumers with little else to spend, which is why consumer spending has fallen.

In other words, borrowing in recent years has impinged consumers' ability to spend today. And borrowing today will impede spending in coming years.

The rapid rise in student loan debt is particularly troubling, since it keeps college graduates from buying cars and, more importantly, homes. That is affecting the entire housing market.

“The muted housing recovery in recent years can be traced in part to slower household formation among young adults,” notes the Federal Reserve Bank of San Francisco.

The San Francisco Fed notes that for nearly five decades, the pace of household formation exceeded population growth about 0.2 percentage point per year, on average. But from from 2007 to 2015, household growth fell relative to adult population growth fell by an average of –0.5 percentage point annually.

In essence, even as the population of young adults has increased over the past nine years, their ability to form their own households has fallen each year.

The consequences have been rather obvious and ominous.

Researcher Harry Dent recently had this to say on the matter:

More 18- to 34-year-olds are now living with their parents than at any time since 1960, when the number hit an all-time low of 20%.

It’s now jumped up to 32.1%, and is as high as 36% for those with a high school education or less. The number jumped to 28% in 2007, with the Great Recession catapulting it to 32% in just seven years.

For the first time in history, living with parents has surpassed living with a spouse or partner, with over 30% of children now living with parents, as the chart below from Pew Research shows. Fourteen percent live alone or as a single parent, with more women at 16% than men at 13%.

There was only one time in modern history where a higher percentage of kids lived with parents and that was 35% in 1940 – in the late years of the Great Depression.

Student loan debt, and the inability to afford a high-priced college education, is driving this troubling trend. Kids who can’t afford college must accept low-paying jobs, which prevent them from moving out on their own to start their adult lives.

While student loan debt is limiting the ability of young graduates to buy homes and autos, it’s also affecting the choices of millions of American kids, who are deciding to forego college altogether due to the cost.

“College enrollment has declined every year since peaking in 2011.” notes Bloomberg. “The reasons include an aging population, rising tuition costs and a healthy rate of hiring that lessens the demand for learning.”

Though graduates earn, on average, about 90 percent more than non-graduates, only about a third of Americans get degrees.

Just 60 percent of college students in the U.S. completed a four-year degree within the six-years through 2014, according to the National Center for Education Statistics.

This is bad news for the country as a whole. The jobs of the 21st Century demand higher and greater education levels. People with only a high school diploma are no longer competitive in the modern, globally connected economy.

We may not like it, but it’s true.

The fact that higher-education costs are playing a role in keeping young people form pursuing more education is awful and intolerable. We are heading toward a dystopian situation in which only the children of the most wealthy parents have the privilege of a college degree.

While vocational degrees from technical colleges are honorable, vital and highly useful, they can produce students who are really good, or skilled, at one single thing, whereas a college education can produce a more broadly educated young person who has (hopefully) developed some critical thinking skills.

Everyone has a stake in this: all employers -- from big corporations to small businesses -- the government (which collects more tax revenue from higher earners and hopes to avoid the costs of social welfare) and even those who don’t have children but want to live in an educated, productive, globally competitive society.

The Organization for Economic Cooperation and Development (OECD) calculated in 2012 the proportion of residents in 34 countries that had obtained a college degree or an equivalent, determining the top 10 “most educated” countries. The U.S. ranked No. 4.

If we want to remain there, much less improve, we must take great steps toward relieving student loan debt and reversing the irrepressibly high cost of a college education.

It’s not just our young people that depend on this; our entire economy depends on it.