The Student Debt Bubble is Stretched Mighty Thin

In my previous column on debt and consumer factors that are receiving little or no attention, I detailed the first of four lurking financial culprits [sub-prime auto loans and the proliferation of vehicle leasing for new vehicles] that will likely cause the ultimate spiral into–if not a more serious version of the 2007 Bush Great Recession–a second Great Depression.financial-stool2

The Second Leg of the Economic Stool That’s Splintering

The second leg in the economic stool that is splintering…scarcity of jobs for the millennial college students, who, for the most part, have crushing debt loads and a job market that holds few prospects for a great many of them. The same conditions that lead to the housing crash are mounting on the $1.3 trillion  in outstanding student loans; a high percentage of them are already in a high-risk category or with default imminent which will put tremendous strain on either the banks that made the loans or the government who back stopped them. $1.3 trillion isn’t insignificant even for the government. And if the GOP decides to simply take the money from some other governmental obligation, like Social Security, Medicare, or the Post Office Pension Fund, then those fund dependees will suffer. One thing is certain. It won’t come out of the Congressional Pension Fund.

And because the student loans are not dischargeable through bankruptcy (like a certain President-elect has done repeatedly with his debts), the government’s extraordinary collection powers kick in after a default. As of the end of 2015 7 million loans have gone at least one year without a payment through either inability or unwillingness to pay back the loans.

The chart below illustrates the extreme proliferation of the the first two legs of the wobbling financial stool as of year end 2015…figures for 2016 are trending equally bad if not worse:

student-debt-copy

Of the total number of student loans outstanding, 43.4% of them are either in postponement, delinquent, or in default as of the end of last year.

In an ironic twist, adding to millennial job woes is that many state government jobs, that used to go to newly graduated young adults entering the work force because they could be hired for lower salaries, are now going to older members of the work force for two primary reasons. Adults over 50 have seen employment harder to obtain in the private sector because companies see workplace loyalty as a negative. The longer one stays with a company, the more they generally cost due to even minor cost-of-living increases over the years; therefore the over-50 group has had to turn to the normally lower-paying public sector just to be able to work at all–viewed by cash-strapped state governments as another plus, since they generally do not have sufficient work years remaining to avail themselves of the public sector pensions normally available upon retirement.

And high youth unemployment is not endemic to just the U.S. It has reached crisis levels around the world, with demand for goods and services drying up due to the austerity/supply-side economics one-two punch of snake oil that the right wings in the U.S. and Europe are astonishingly still buying despite being proven time and again to be absolute rubbish. Almost 13.1% of the global youth labor force is projected to be out of work at the end of 2016, [up from 12.9% end-of-year 2015] according to the International Labor Organization.

But the youth unemployment problem has a unique element in the US; the weak U.S. youth job market has collided with record levels of educational debt ,[this is because so many other countries provide tuition-free public university education] reaching about $35,000 per graduate on AVERAGE. This does not include students who acquire student loans, for myriad reasons never complete their degree requirements, but are nonetheless on the hook for the loans. Together, they pose a hazard of enormous proportions to the future earning power of young Americans, as well as the credit and/or discretionary income of their parents if they co-signed the student loans and could have severe, long-lasting effects on US demand for goods and services and therefore, GDP growth.

The share of American 18-to-30 year-olds who were employed full time fell to 54 per cent last year, (the lowest since the labor department began tracking data in 1948) according to the Pew Research Center. The share of that age group who are still in college has risen, but the researchers say this only minimaly explains the drop. The jobless rate for Americans age 16 to 24 is now over 16 per cent.

Under Obama, the government has made some disappointingly minor moves to ease the student debt burden, accelerating a program that cuts federal loan payments for low-income borrowers and forgiving unpaid balances after 20 years instead of 25 if paid up-to-date. It is also easier now for nearly 6 million borrowers with more than one federal loan to consolidate their debt.

The White House also pushed another measure to make college more affordable as a part of the stimulus package passed in the wake of the 2007 financial crisis expanded tax credits for tuition, and last month Congress struck a deal to prevent interest rates on some new student loans from doubling.

Unfortunately, supporters say such efforts are not enough given the huge scale of the problem. Some are even urging the government to offer income-based repayment plans for the loans. But the passage of these measures are unlikely given that Trump has surrounded himself with even more Wall St. bankers and billionaires than his Republican predecessors.

With more young people living at their parents home, the rate of new household formations – a leading driver of housing demand – is now commensurate with the 1940s, according to a Harvard study. Just 600,000 to 800,000 new households were formed each year from 2007-2011, compared with 1.2m to 1.3m per year in the previous four years.

In a long line of American Dreams disappearing faster than the polar ice mantle, Americans under the age of 35 have lost more than a third of their net worth since 2001, compared with a 27% decline for all ages, according to the Bureau of Labor Statistics.

While a university degree still fortifies a better chance at a higher income than a high school diploma, the median income of college graduates fell nearly 10% from 2007 to 2010, according to the BLS, compared with a 5% fall for high school graduates and a 3% for the existing workforce at the beginning of the Great Recession in December 2007 .

Young Americans are well aware of their precarious place in today’s economy, with only 16% in a Rutgers University survey of recent university graduates who believe their generation will have greater financial success than their parents.

This leaves a long term economic recovery closely tied to the fortunes of a generation gripped by high levels of debt and falling discretionary income from the jobs that require the education the debt buys. Assuming the United States is still remotely a capitalistic society based on consumerism, one would think that the folly of continued funneling of tax breaks to the wealthy and subsidies to the corporatocracy while ignoring the steep decline in consumerism other than through debt would be evident.

Even if Trump and Congress can ram through deficit-increasing infrastructure programs, that were rejected as long as Obama was in office, it will be too little too late to have a widespread effect on the discretionary income for the huge swath of middle and low income families still reeling from Bush’s housing collapse and 6 years of Republican total obstructionism.

And since our so-called Capitalistic, free-market society (which is a misnomer because the average corporate government subsidy amounts to $456,000 per employeenot including the $4 billion per year the U.S. gives foreign oil companies to pay their rent on their leased Canadian-built oil rigs) depends on consumerism, it’s obvious that the Republican “business party” has consistently taken steps which reduces the purchasing capacity of 99% of the population.The debt burdens of students will only serve to exacerbate the condition.

Even though there is no direct effect on private lending institutions if/when university debt repayment collapses because they are government-backed loans, it will place more pressure on the shrinking stream of operating funds available to the government. With the GOP-control of all branches of government as of January 20th, 2017, reduction of taxes is a certainty on the wealthy and corporations which has NEVER stimulated job growth. As is the ultimate GOP goal, it won’t take long for either the national debt to explode,the elimination of government programs (except for Congress and the Department of Defense), or both.

We’ve already witnesed the largest transfer of capital from the lower and middle class to the upper 1% in history ever since the scam of trickle-down economics was hatched by conservatives. As the millennial generation tries to deal with the largest post-matriculation debt burden in the history of civilization, consumerism will continue to falter world-wide.

For those who are counting, that’s two legs of the economic stool, (sub-prime auto loans/leases and student debt loads) poised to collapse. Next, we’ll talk about all those multi-billion dollar pension funds and the FDIC; both of which are more under-funded than was AIG, the insurer of all those bundled, investment bank mortgage-backed securities in 2007 that caused the real estate crash…

Harvey Gold

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