Nearly Half of Student Loans “in Distress”

Student loan bubble now over $1.5 trillion

Image Credits: Kit / Wikimedia Commons.

Student loan debt has grown to over $1.5 trillion.

And that just accounts for loans held by Federal Student Aid. It doesn’t include private loans. Meanwhile, the Department of Education says 43% of those government-backed loans are considered “in distress.”

In a speech last month, Education Secretary Betsy DeVos put the current level of student debt in perspective.

“One-point-five trillion dollars is almost impossible to fathom. So, let me put it this way: $1.5 trillion is more than $10,000 of someone else’s student loan debt for each and every American taxpayer—145 million of them.”

Most people saddled with this debt aren’t paying it off. According to DeVos, fewer than a quarter of student loan borrowers are paying down their principal. Most are simply making interest payment — if they are paying anything at all. Nearly 20% of all loans are delinquent or in default. That’s seven times the rate of delinquency on credit card debt, according to DeVos. Nearly 43% of all loans are currently considered “in distress.”

For many borrowers, their debt is actually increasing over time. CNBC provides this anecdotal case.

“Law school graduate Rick Tallini borrowed around $55,000 in the 1990s. He’s since struggled to find employment and pay the bills, and today his student loan balance has ballooned to well over $300,000.”

According to data from the National Postsecondary Student Aid Study, the average debt load at graduation for the 2015-2016 school year came in at $30,301.

That means millions of American are struggling under the crushing weight of student loan debt. Defaults are on the rise and student loan debt is one of the biggest factors driving a growing trend of millennials struggling to transition into adulthood. The average student loan borrower pays $351 per month to service those loans.

This creates a tremendous drag on the economy. Every dollar spent paying off loans is a dollar not available to buy houses, cars or put into savings.

Parents are even beginning to feel the squeeze.

A Department of Education program called Parent Plus allows parents to take out loans to help pay for their kids’ schooling. The program has loans outstanding to more than 3 million Americans. The number of families enrolled in Parent Plus has increased by more than 60% since 2005. Borrowers in the program owe roughly $77.5 billion – an average $22,000 per borrower, according to Education Department figures.

By the way, you and I are on the hook for all of these loans. They are backed by the federal government. That ultimately means the taxpayer.

DeVos reveals just how significant the level of student debt has become, noting that it comes with “significant risk.”

“At 1.5 trillion dollars, FSA’s loan portfolio is now one-third of the Federal government’s balance sheet. Last year, uncollateralized student loans—which are all of them, by the way—accounted for over 30 percent of all federal assets. One-third of the balance sheet. Only through government accounting is this student loan portfolio counted as anything but an asset embedded with significant risk. In the commercial world, no bank regulator would allow this portfolio to be valued at full, face value. Federal Student Aid has a consumer loan portfolio larger than any private bank. Behemoths like Bank of America or J.P. Morgan pale in comparison. FSA also is the largest direct loan portfolio in the whole Federal government—by far—surpassing all other federal direct loans combined by 1.1 trillion dollars.”

DeVos admitted that the spiraling level of student debt has “very real implications for our economy and our future.”

“The student loan program is not only burying students in debt, it is also burying taxpayers and it’s stealing from future generations.”

This is yet another bubble created by government. DeVos seems to be pushing for reforms, but it seems highly unlikely Congress will do what is necessary to address the growing student loan bubble. And like all bubbles, it will eventually pop.

The bottom line is that the student debt bubble will ultimately impact US markets and average Americans. You can learn more, and how to prepare yourself, in Peter’s white paper The Student Loan Bubble: Gambling with America’s FutureGet the free download here.