…Not the other way around.
It’s when people are unable to repay their debts that the banks start running aground, except when the loans are nondischargeable and either pre-TARPed by the government (guaranteed FFEL loans) or auto-TARPing (direct loans). Then the problem is wholly different: The loan balances simply grow like a cancerous polyp on aggregate consumer credit reports. And this is what’s happening—not that the Fed believes it.
Enter the New York Fed’s recent “Household Debt and Credit Card Report” on student loan debt. In the “Special Section: Student Loan Debt,” it reads:
Higher education is crucial to improving the skill level of American workers, especially in the face of rising skill premiums and a relatively unfavorable labor market for less skilled workers. Due to increasing enrollment and the rising cost of higher education, student loans play an increasingly important role in financing higher education, and student debt is the only kind of household debt that continued to rise through the Great Recession.
…Which I take to mean that the Fed also believes that we can’t possibly create a “favorable labor market for less-skilled workers” and so we must—MUST—educate them via debt.
So the delinquency rates are sky-high. Note that these estimates mix federal and private debt.
Let’s create a parallel universe where the loans are dischargeable in chapter 7 and after a chapter 13 repayment plan. What would we see? For one, the debt levels wouldn’t be increasing through the depression:
Student debt is the only kind of household debt that continued to rise through the Great Recession and now has the second largest balance after mortgage debt.
These are not good things. Rising debt without rising growth is very bad.
According to The Wall Street Journal, the Fed’s economists don’t speak as boldly about higher-ed-for-all as the report does, but there is a kernel of dread slowly growing from the denial. “The high delinquency rate is very worrisome, said Wilbert van der Klaauw, an economist with the New York Fed, noting that higher education has traditionally produced a sizable financial payoff. ‘We hope the returns to these educational investments are going to be there” as the labor market rebounds, he added.’”
The good news for the Fed—other than the fact that none of its economists will lose their jobs for failing to observe the obvious—is that the student loan bubble can’t destroy the economy, unless private lenders lend out, like, another $4 trillion on top of their mere $150 billion. It is, however, embarrassing for the government to say that its loans are “traditionally” good debt when a third of the youngest debtors are delinquent, and it’s slowing growth because it’s a capitation tax on our supposedly most-productive workers. The shortfall to bondholders can be paid with rich people’s taxes; your living standards won’t be reduced a whit (unless the government really does decide to levy a capitation tax).
The bad news is that the government still doesn’t really care if people are defaulting on the loans.