Ameriprise Financial’s chief economist, Russell Price, is asked all the time when talking to client groups if the exploding amount of student debt will turn into our next economic crisis.
It’s not a naive question. Outstanding student debt has more than tripled in the last dozen years, to $1.6 trillion. That seems to be just the kind of out-of-control borrowing that will someday lead to a reckoning, with surging defaults, collapsing asset values and fear spilling into other parts of the system.
Price said he has answered this question so many times he decided to put his thoughts into a research note. It’s one of those situations where the averages aren’t really very helpful in forming a clear picture.
Earlier this year, the average debt per borrower was around $37,800, which sounds like a lot until you find out most borrowers have less than $20,000 in debt.
It turns out that about 6% of borrowers were responsible for roughly a third of all debt, as of 2018, mostly incurred getting advanced or professional degrees. These graduates, maybe in law or medicine, generally make much higher than median annual income. Borrowing money to invest in education could easily have been a good decision.
As for the risk to the financial system, a lot of clients clearly remember the financial crisis, Price said last week. “It was primarily a debt issue. So the question I get asked is if that’s going to be the same situation with student loans. And no, this is not a threat to the financial system, because, for better or for worse, it’s mostly guaranteed by the government.”
That means there won’t be a sudden realization among bond investors and banks that this debt is not worth nearly as much as they once thought. Student loan debt problems won’t cause markets to seize up with fear.
Price picked up a couple of other positive tidbits from this student loan work. For one thing, the rate of growth in student loans has been steadily declining, down by about two-thirds from the almost 15% per year annual growth rate around the time of the financial crisis.
That’s partly because total enrollment in college declined in the last year for the eighth year in a row. The decline has been particularly steep for four-year, for-profit colleges, down nearly 20% in the most recent report.
Looking through a rosy lens, this suggests the market may be working, as prospective students have seen what has been happening and become savvier when weighing future earnings against the cost of education and money they would have to borrow to pay for it.
“More and more media coverage of this debt situation has helped people become more aware of these grant programs,” Price said. “Not only is the amount being offered increasing, but the number of people taking them up on them seems to be increasing as well. And that’s a positive story.”
Price sounded even more positive about the state of consumer balance sheets, giving a lot of space to the consumer in his latest periodic economic update, posted just last Thursday. He suspects the American consumer is much better off than people appreciate.
“In the just completed second quarter, consumer disposable income grew faster than consumer spending, which is somewhat unusual,” he said. “What’s really unusual is that the ninth consecutive quarter that that’s happened. Throughout this entire economic expansion, consumers have spent 85% of their income gains. That’s never happened, at least over modern history.”
In the run-up to the Great Recession, incomes increased but spending increased faster, meaning people were borrowing money. Now they are paying back loans or saving.
Total credit card debt is about 6.5% of disposable income, way down from what Americans owed on credit cards just before the Great Recession or during the dot-com boom two decades ago. The delinquency rate on all consumer loans, meanwhile, is lower than it was at any time in the 1990s or 2000s.
One dial on the dashboard Price particularly likes is the Federal Reserve’s financial-obligations ratio, which looks at all the monthly payments consumers have to make and compares them to incomes.
“And today that ratio is at levels that we haven’t seen since the early 1980s,” he said. “Through every other expansion, it goes up very high and then you have a recession and it comes crashing down. In this current period, people have been much more conservative. They remember the hard days of the financial crisis.”
Of course, these are the numbers for everybody. And once again it looks like the averages don’t do a great job of capturing the full picture.
About 4.5 million Americans are heavily burdened by their student loans, Price said. The two big groups having the most trouble with their student loans are those who accumulated a lot of debt yet didn’t get a degree, and students who went to for-profit colleges. Not only did those attending for-profit colleges take out much larger loans than the average for all students, a much higher percentage of students at these schools ended up with loans.
Price, by the way, is a financial economist working for a big Minneapolis-based financial firm. He’s not a policy advocate on education finance, but when he talks about struggling borrowers, it’s obvious he’s sympathetic.
His point: 4.5 million people isn’t a lot, not when you see that just the consumer side of the economy is made up of close to 130 million American households.
This seems to highlight one of the most interesting aspects of writing about American economic life these days. We are familiar with the data on growing income and wealth inequality, and student loans seem to be just another version of the same story.
There’s not an economy-killing student loan crisis coming. Instead there are a whole lot of personal ones, at least 4.5 million of them unfolding right now.