Good News: Students Borrowing Less From Education Department

The bad news is that I just updated the LSTB’s student debt data page, but revising it again is my problem, not yours.

For those in the know, the Department of Education (ED) tracks the amount of debt the government lends out each quarter (and each academic year), going back to the late 1990s. Here’s total borrowing by loan program, which includes direct loans and guaranteed loans back when they were around.

Amount of Federal Loans Disbursed

Don’t let the 2012 data throw you. Because Congress stripped subsidized Stafford loans from graduate and professional students, the 2012 bars’ meanings completely changed from previous years. Now all subsidized Stafford loan borrowers are undergraduates only, and ED kindly separated graduate unsubsidized borrowers from undergraduates. Nevertheless, the total amount of Stafford borrowing is dropping. In the 2011-12 academic year it was $85 billion; in 2012-13 it fell to $78 billion.

The declining loan volumes imply that the Office of Management and Budget’s long-term direct loan projections, which are discussed in the aforementioned student debt page) are probably high.

Projected Direct Loan Balance (OMB)

Less money lent out means fewer dollars likely to be lost to the program, so I consider this good news. However, the amount of money lent in 2012-13 is still sky high compared to the middle of the decade, and we don’t know who’s not borrowing, why they’re not borrowing, or whether their parents are just taking out dubious 410(k) loans instead.

Parent PLUS loan borrowing is down as well (-170,000 recipients), but that’s probably due to ED tightening the eligibility requirements on those loans. Grad PLUS loans are down slightly too, with about 18,000 fewer recipients. At most 2,000 of these can be attributed to law school graduates who were not replaced in the 2012-2013 academic year.

Here’s a chart of the number of recipients by loan type:

No. Federal Loan Recipients Per Year

(Note: the data point for unsubsidized undergraduate Stafford borrowers overlaps with the point for all PLUS borrowers in 2012, 6.9 million (left) and 697,000 (right), respectively.)

…And here’s the amount disbursed per recipient:

Amount Disbursed Per Recipient

Splitting graduate unsubsidized Stafford borrowers from the undergrads reveals just how much more graduate and professional students borrow. If grads and professionals go add Grad PLUS loans to their unsubsidized Staffords, they’re taking on more than $37,000 in debt in one academic year. Since there were 335,000 Grad PLUS borrowers last year, we can expect that in the near future, the highest student debt brackets (e.g. >$100,000) that we’re told aren’t really a problem will increase more quickly than the lower brackets. This much is not good news.

I’d give an update on the freestanding private law schools, but for some reason Western State didn’t appear in the data and I’m waiting for an explanation from ED.

THE LAW SCHOOL DEBT BUBBLE: $53 Billion in New Law School Debt by 2020

So we know that in 2010, a majority of 44,245 law graduates took on $3.6 billion in student debt based on comparing Official Guide and U.S. News data. Without back issues of U.S. News, is it possible to figure out how much debt previous classes took on, and—*gasp*—project it into the future?

Yup.

The ABA provides a piffle of a PDF titled, “Average Amount Borrowed for Law School,” which begins with the 2001-2002 school year and ends with the 2009-2010 one. I’m guessing the law schools didn’t send the ABA 45,000 debt numbers but merely the average of their students’ debts, so what you see on the ABA’s PDF is not the average debt load of public and private law school graduates but is actually the average of law schools’ reported average graduate debt levels. To test the ABA’s version’s accuracy, let’s compare its numbers to the average of U.S. News’s law schools’ average debts for the 2009-2010 school year.

SOURCE PUBLIC AVERAGE PRIVATE AVERAGE
U.S. News $70,795 $107,182
ABA $68,827 $106,249

The average public law school’s average students’ debt differs by about 3%, private schools 1%. Clearly, we’re talking about the same stuff, so we can use the ABA’s numbers. Here’re graphs of graduate debt levels.

And yes, they track 3-year average tuition levels, at least for private law schools. For public law schools, I added one year of non-resident tuition to two years of resident tuition, and it falls a little short, which suggests that either a large proportion of people who go to public law schools move to different states and pay at least one year of resident tuition, or public law school students have been taking on more debt than before the turn of the century.

With the ABA data in hand, there are three more things we need to determine total law school debt: the number of graduates, the breakdown of graduates (public/private), and how many of them took on debt. The split between public and private law school grads in 2010 was 34%/66% according to the Official Guide, and roughly 84% of all public school grads took on debt as opposed to 83% of private grads according to U.S. News. Using these assumptions we can compare total graduate debt for the class of 2010 with the two methodologies.

SOURCE TOTAL PUBLIC GRADUATE DEBT TOTAL PRIVATE GRADUATE DEBT TOTAL GRADUATE DEBT
U.S. News $951,772,400 $2,668,868,422 $3,620,640,822
ABA $869,979,117 $2,497,898,010 $3,367,877,127

It appears the ABA data are more generous than the U.S. News ones are, placing total graduate debt at $3.368 billion rather than $3.62 billion.

Using the “public/private grad split” and “percent who take on debt” assumptions from above, we can calculate how much total law school debt law grads took on going back to the 2001-2002 school year. Although, we should note that only two of the sixteen law schools that received ABA accreditation between 2001 and 2009 were public schools (Irvine received accreditation in summer 2011), so these numbers likely underestimate the totals because the proportion of public law school graduates would have been greater at the beginning of the decade (say 37% tops) than now.

Since the debt levels are growing exponentially, here’s the projection for 2020 grads.

It appears legal education has been one of America’s winning industries for the last twenty years, posting an estimated 6.8% annualized growth rate in terms of debt revenue alone, though that’s a slight overestimate due to the relatively greater number of graduates between 2001 and 2009. In the future, total annual graduate law school debt will double by the end of the decade (~$6.8 billion/year), and this is a conservative estimate because many public law schools are rapidly “privatizing” by going off state subsidies. Continued high unemployment will encourage this process for those public law schools that aren’t leaving the state dole whole hog, such as Minnesota and Arizona State. Public law schools will supplement subsidy shortfalls with tuition increases and a handful of alumni donations. This will add $50.6 billion onto around 500,000 future law graduates’ shoulders. In 2010, the total average debt for graduates who took on debt was $90,959. At current graduation rates, in 2020, of 54,536 graduates, 45,625 will take on debt, and their total average debt will be $149,120 ($114,801 for public school grads; $173,161 for private grads).

$50.6 billion isn’t completely accurate because not everyone who starts law school finishes. The ABA kindly furnishes us with a PDF that tells us what law school attrition rates are by year (and if you do the math, you’ll find that about one entering student in eight drops out). It doesn’t tell us what the rates are by public or private law school (the Official Guide would), though I’d guess more are private than public. Nor does it tell us how many of them took on debt. I’ll use our previous assumptions anyway and add the following: (1) 1Ls paid 1.5/6ths of what they would’ve paid as 3Ls, 2Ls 4.5/6ths of what they would have paid as 3Ls, and 3Ls 5.5/6ths of what they would’ve paid had they not left. It’s crude, but fair. (2) Those who paid never came back, and (3) they all paid with debt. The attrition PDFs are all missing the 2008-2009 school year (stupid ABA), so I averaged the numbers from the previous and succeeding years to fill the gap. I’m omitting 4L attrition. They’re few in number, and I suspect many of them returned to complete their degrees later. Here’s what we get:

Attrition adds about 6% to the debt totals, increasing the numbers to $53.442 billion, an additional three billion dollars ED will disburse.

According to the Office of Management and Budget, the U.S. will issue $1,302 billion in Direct Loans by FY2020 (Table S-12). $53.4 billion of that will be new law school loans (4.1%), if these data are comparable. I don’t think anyone has an idea of how much existing student debt is for law school, but given what the ABA data already show and looking backwards, it’s probably between ten and thirty billion dollars. Knowing how anemic job growth has been for lawyers over the last few decades, it is clear that the federal government will waste a lot of money supporting the legal education system due to the impracticability of repayment under even 25-year repayment plans, leading to near-universal use of Income-Based Repayment.

I’m in favor of IBR, but endless law school tuition increases makes this a losing program for ED and taxpayers, unless the interest from everyone else repaying their loans covers forgiving billions of dollars in law school debt. However, I doubt the Congressional Budget Office, much less OMB, has projected IBR’s effects twenty-five years from now using fair-value accounting.

Meanwhile, doubling law school debt in ten years all but verifies that law schools are Winston Universities, claiming to ED and Congress that law students must spend billions of federal dollars on educations that in many instances are superfluous to the economy’s needs and are overpriced for the few that are. We can only hope Congress kills the Direct Loan Program and restores bankruptcy protection from student loans before this problem gets worse.

Sadly, the ABA was in the best position to ensure that law schools worked efficiently and were not over-enrolled, yet it stood by while law schools prioritized their own prestige over their students’ welfare. Beyond the cost to students and taxpayers is the immense shame the ABA and the legal profession will face.

Federal Student Loan Debt Will More Than Double by 2021; GDP, Not So Much

A few weeks ago I painstakingly projected where the federal government’s Direct Loan Program was going, and for the last several months I’ve been tracking growth in government holdings of nonrevolving debt as a proxy for the government’s Direct Loans balance to prove that. Here’s what I projected:

Then a reader directed me to the Office of Budget and Management’s (OMB) Mid-Session Review (MSR), which has been doing this all along. The following data come from the 2012, 2011, and 2010 MSRs. The 2009 MSR doesn’t have Direct Loan balances (but amusingly, it fails to predict the recession, which doesn’t bode well for OMB’s credibility).


What’s neat is that my projections were largely accurate. The Direct Loan Program will cause student debt to grow from 1% to 8% of GDP yet never crest it. The loan balance is growing linearly, thankfully. However, there are two potential flaws. One, the GDP growth the government is projecting may not come to pass. Sure, recovery will eventually come, but refusal on Congress’s part to increase spending and the Fed’s inaction suggest that we are taking the slowest, most painful path to recovery. Slow growth implies a higher debt-to-GDP ratio of Direct Loans.

Two, here’s a table of the numeric growth in Direct Loans:

YEAR DL NUMERIC GROWTH ($ Billions)
2009 293
2010 179
2011 110
2012 126
2013 173
2014 148
2015 138
2016 123
2017 107
2018 101
2019 96
2020 94
2021 96

The numeric growth includes a combination of newly originated loans less defaulted and repaid loans. Notice how the numeric growth declines below $100 billion per year by the end of the decade. Assumedly, this decline is due to loans originated now being repaid. Although, there’s good reason to suggest they won’t be. The government uses “accrual accounting” to determine the value of the loans, which excludes the actual market risk caused by a poor economy. If the economy is depressed, the government will receive a lower return on its loans due to defaults and Income-Based Repayment (IBR), which is effectively a twenty-five (and soon twenty)-year Chapter 13 bankruptcy plan. Student loans are the only type of consumer debt increasing in this depressed economy, and their nondischargeability reduces debtors’ purchasing power, which further hampers economic growth.

By contrast, we know that when we apply fair-value accounting rules to Direct Loans, the government loses money. Meanwhile, we don’t know if the government is taking tuition increases into account. There’s zero evidence that higher education will cost less in the future, so as tuition increases, so will debt loads, and by extension the amount the government is willing to give to ED to loan out.

Doubling the amount of debt on the government’s books makes sense if the gains materialize, i.e. the graduates’ educations transform them into more productive workers than had they not gone. This would be signaled—not proven—by significant growth in wages for college graduates, which we haven’t seen for many, many years. Whether college degrees alone actually transform students into better workers has not been established, and I believe it to be false.

Loaning a trillion dollars over a decade for higher education when the returns are doubtful is not something the private sector would do without loan guarantees. Thus, ending the guaranteed loan program in 2010 was a good idea as it was costly to the government, but doing so gave the federal government a pyrrhic victory because it’s now essentially guaranteeing the loans to itself. Ultimately, we will have to choose between letting the private sector finance higher education with some combination of fully dischargeable student loans and human capital contracts, or the government will have to pick up the tab and assume the risk of buying educations for people who may not use them productively.

2010 Law School Grad Debt at $3.6 Billion

A reader recommended I calculate total law school debt for 2010 grads. How? By taking the number of grads from each law school in the Official Guide and then multiplying them against the average debt levels and the percentage of students taking on debt in U.S. News and World Report’s rankings. Why this isn’t in the Official Guide is beyond me. These data can tell us quite a bit, and it’s only part of some research I’ve been doing.

First, a caveat: U.S. News isn’t complete. It excludes the Puerto Rican law schools, which as I’ve written before are their own unique disaster. It’s also missing a few points. So, for University of Phoenix, Harvard University, and Appalachian School of Law I used the average percent of graduates with debt (85.1%). For Florida International, I duplicated Florida State’s debt numbers and percent with debt, same for Indiana-Indianapolis from Indiana-Bloomington, and Widener-Harrisburg from Widener-Delaware. I also found La Verne’s and Widener-Harrisburg’s number of graduates from their websites as the Official Guide misprinted Widener-Delaware’s data for Harrisburg’s (shows how no one reads the Official Guide), and it excludes La Verne because it had lost its accreditation.

After slapping this into a spreadsheet, here’re a few factoids.

(1)  The average 2010 public law school graduate had $53,661 of debt at graduation; for private school grads it was $79,699. The average overall law student took on $97,306 (yes, the overall average is greater than the public/private ones).

(2)  2010 public law school grads incurred $951.8 million in debt; private graduates $2.669 billion. Total law school graduate debt was $3.621 billion in 2010.

(3)  The average public law school gained $12 million in debt from 2010 grads (median 10 million, standard deviation $7,710,185); that’s $22.8 million for private law schools (median $19.6 million, standard deviation $13,699,205). Here’re the dispersals.

And here’re the top 20 law schools by total graduate debt. For public schools the list isn’t too surprising. For private schools, though, it’s an interesting mix of prestigious and not-so-prestigious law schools. Some of it is high cost and some of it is large enrollments. However, I can’t ignore how much of an outlier Cooley is, so I included the z-score’s on the right of the table. The z-score measures a data point’s distance from the mean, and it’s measured in standard deviations. Cooley’s 4.72 tells us it is way out there.

# PUBLIC SCHOOL TOTAL PUBLIC GRADS’ DEBT (2010) Z-SCORE
1 California-Hastings 35,570,896 3.05
2 Michigan 35,510,278 3.04
3 Virginia 34,631,340 2.93
4 Indiana (Indianapolis) (Est.) 31,571,512 2.53
5 California-Los Angeles 28,055,645 2.08
6 Baltimore 26,128,664 1.83
7 Texas 23,974,030 1.55
8 California-Berkeley 22,810,122 1.40
9 Temple 20,771,127 1.13
10 Indiana (Bloomington) 20,695,707 1.12
11 Minnesota 20,487,209 1.09
12 Penn State 19,684,105 0.99
13 Maryland 19,049,364 0.91
14 George Mason 18,726,770 0.87
15 Florida 18,699,633 0.86
16 Rutgers (Newark) 17,373,648 0.69
17 Wisconsin 16,589,299 0.59
18 North Carolina Central 15,495,257 0.45
19 Oregon 15,462,409 0.44
20 Houston 15,323,970 0.42

**********

# PRIVATE SCHOOL TOTAL PRIVATE GRADS’ DEBT (2010) Z-SCORE
1 Cooley 87,410,308 4.72
2 Georgetown 68,060,738 3.30
3 Harvard (Est.) 58,024,861 2.57
4 American 53,397,546 2.23
5 New York University 49,767,194 1.97
6 New York Law School 48,762,544 1.89
7 Florida Coastal 47,445,152 1.80
8 Suffolk 47,203,984 1.78
9 George Washington 45,084,600 1.63
10 Fordham 43,865,940 1.54
11 Loyola Marymount (CA) 43,621,657 1.52
12 Columbia 42,031,490 1.40
13 Brooklyn 37,970,649 1.11
14 Pacific (McGeorge) 36,806,108 1.02
15 Stetson 36,236,370 0.98
16 John Marshall (IL) 35,749,033 0.94
17 Miami 35,670,595 0.94
18 South Texas 35,593,309 0.93
19 Catholic 34,665,333 0.87
20 Cardozo 34,165,228 0.83

I have more to say on aggregate law school debt growth, but that’s for a separate post.

[UPDATE: Here's the post, "THE LAW SCHOOL DEBT BUBBLE: $53 Billion in New Law School Debt by 2020."]

Consumer Credit Update (2011 October)

It’s the fifth business day of the month, which means the Federal Reserve has updated its G.19 Release, its estimate of outstanding consumer credit. One problem the U.S. economy faces is that nonrevolving consumer credit is growing faster than the economy. While the G.19 Release doesn’t quantify how much nonrevolving debt is student debt, it is very likely that most increases in that category are attributable to the Direct Loan Program’s student loans because of high tuition and the near impossibility of discharging student debt in bankruptcy. All figures are billions of dollars, and all percentages are annualized. Link here for my ongoing analysis of increasing nonrevolving debt relative to GDP and Direct Loans projections.

This month, the Fed revised the second quarter 2011 numbers again. These are seasonally adjusted.

2011 Q1 2011 Q2 r 2011 Q2 r
Total 2,421.5 2.2% 2,442.5 3.5% 2,442.5 3.5%
Revolving 792.8 -3.7% 795.9 1.6% 795.9 1.5%
Nonrevolving 1,628.6 5.1% 1,646.6 4.4% 1,646.6 4.4%

Not much of a change. Here’s what we get for August.

2011 Q2 r 2011 July r 2011 August p
Total 2,442.5 3.5% $2,454.4 5.9% 2,444.9 -4.6%
Revolving 795.9 1.5% $792.3 -5.4% 790.1 -3.4%
Nonrevolving 1,646.6 4.4% $1,662.1 11.3% 1,654.8 -5.2%

So there’s a seasonally adjusted drop last month in consumer debt. Good.

As for holdings of nonrevolving debt, government holdings account for nearly all the growth of nonrevolving credit as well as the largest annualized increase. These numbers are not seasonally adjusted and do not sum together; annualized increases are mine.

July (revised) August (preliminary) Numeric Change Annualized Increase
Total NRV 1,652.6 1,661.7 9.1 6.8%
Government 385.7 391.8 6.1 20.7%
Commercial Banks 491.3 492.5 1.2 3.0%
Finance Companies 432.7 434.1 1.4 4.0%
Credit Unions 186.6 188.7 2.1 14.4%
Savings Institutions 37.0 37.3 0.3 10.2%
Nonfinancial Business 44.7 44.9 0.2 5.5%
Pools of Securitized Assets 74.5 72.3 -2.2 -30.2%

In non-seasonally adjusted terms, nonrevolving debt still increased, and government-held debt is still growing the fastest, though not as fast as July when it grew at a 64.1% annualized rate. According to the BEA, real economic output grew at a 0.4% in Q1 2011 and 1.3% in Q2.

Direct Loans One Year On: Government-Held Nonrevolving Debt Grows 66%; GDP, 3.7%

In March 2010, President Obama signed the Health Care and Education Reconciliation Act. One of its provisions terminated the infamous Federal Family Education Loan Program (FFELP), leaving the Department of Education as the sole originator of all federal student loans via the Federal Direct Loan Program, which has existed since 1993. Starting July 1, 2010, all new federal student loans would be Direct Loans, and this is a good thing, at least because the FFELP was monumentally wasteful. It allowed banks to play middlemen over nondischargeable student debt, grossed ED an average $1.22 on every $1.00 for every defaulted loan, and fueled the Student Loan Asset Backed Securities (SLABS) trade. Direct Loans alone, the thinking went, would solve these problems once and for all. As I’ve written elsewhere, the government is making two crucial errors. One, its accounting system doesn’t measure student loans’ full market risk; two, it doesn’t hold higher education accountable, sitting by while universities capture student loans’ value and increase tuition above inflation regardless of job availability (Gainful Employment Rule aside).

One year after switching to Direct Loans exclusively, looking at the Federal Reserve’s G.19 Release and the Bureau of Economic Analysis’s nominal GDP values, we find that the Direct Loan Program’s sole result is… increasing student loan debt. Government-held nonrevolving debt grew 66%, GDP only 3.7%. In numeric terms, during the 2010-2011 academic year (second quarter-to-second quarter), government nonrevolving debt grew $147.5 billion ($222.6 billion to $370.1 billion), GDP, $529 billion.

How do we know that government-held nonrevolving debt is mainly student debt? According to the Office of Budget and Management, in FY 2010 (October 2009 – September 2010), ED lent $74.709 billion in Federal Direct Loans, bought $56.909 in student loans off the market ($131.618 billion) and spent the final $42.141 billion in FFELP loans. In FY 2011 (October 2010 – September 2011), it calculates that it will have lent out $133.507 billion in Federal Direct Loans, and in FY 2012 it will increase that to $145.129. So these numbers mostly line up, but it’s important not to confuse Federal Direct Loans and government-held nonrevolving debt.

To give you a better idea of how bad 2010-2011 was for Direct Loans, here’s what nonrevolving debt has looked like over the past decade (second quarter-to-second quarter).

And here’s its ratio to GDP:

From 2008 to 2010, total nonrevolving debt fell by $26.1 billion, yet government-held nonrevolving debt grew by $118 billion due to more universities switching to the Federal Direct Loan Program and the federal government buying up FFELP loans, doubling the government’s holdings of nonrevolving debt.

So in the 2010-2011 school year private sector holdings of nonrevolving debt contracted by $81.3 billion, yet the government’s increased by $147.5 billion. Government-held nonrevolving debt is the only kind of consumer debt that is increasing during a time of excess private sector debt and low GDP growth. That’s bad, and it would be decreasing if student debt were dischargeable in bankruptcy. By comparison, revolving debt (credit cards) has fallen to 5.26% of GDP, the lowest this century.

(These are end-of-year data and not Q2-to-Q2; 2011 projections are my own; additional source: 1.54 Release (mortgage debt: 2009-2011, archives 2004-2008 (the February updates show the data from five years earlier))

Naturally, education is something we expect to provide value in the future rather than in the present by creating more productive workers, so ED wants the public to believe that once the economy recovers all this debt will be paid down and the debt-to-GDP ratio will fall. This outlook assumes that higher education is reasonably priced and provides the value it claims to—two points that are likely false and are certainly unsubstantiated.

PROJECTIONS

To illustrate the implications of the current policies, it’s worthwhile to predict what will happen if they continue, so let’s assume that the 2010-2011 school year is indicative of the future; in other words ignore the FY 2012 increase in Direct Loans. Basing the future on the recent past isn’t implausible. As far as I’m concerned, if Krugman thinks the Congressional Budget Office is fantasizing a recovery in 2015, I’m convinced too, so we’ll assume the nominal GDP growth rate is the same over this decade as in the past school year. I’ll also assume that others’ holdings of nonrevolving debt will contract at the same rate as in 2010-2011 (it’s not really relevant beyond the $700 billion of remaining FFELP loans and another $100-200 billion in private student loans). The one place I’ll break is with the government’s holdings. If we believe that it’ll grow at 66% indefinitely, then we’ll have $35 trillion dollars of government-held debt by 2020, and that, frankly, is absurd. Given the budget data from above, the government is willing to lend out roughly $135 billion every year, so I’ll increase government-held nonrevolving debt linearly rather than exponentially like everything else. We get this:

And the ratio to GDP:

That’s $1.6976 trillion in government-held nonrevolving debt (from $370.1 billion after Q2 2011), and a debt-to-GDP ratio of 8.19% (up from 2.47%). Although I’d trust the accuracy of this projection through, say, 2014, in my opinion the crude result appears right: government-held student debt will approach 10% of GDP. The only things that could shift this are better macroeconomic management (e.g. a Newer Deal), the Asian Import Fairy, a Euro breakup (which would worsen the situation), and the Gainful Employment Rule forcing for-profit colleges into private sector student loans—not that it’d help the overall situation, but it would change the debt composition. What happens to the remaining several hundred billion dollars of FFELP loans and private student debt is anyone’s guess.

What does this mean?

The good news about the student debt bubble: The U.S. government is NOT Lehman Brothers. It can NEVER go bankrupt. Lehman failed because it couldn’t pay its creditors with its earnings. The United States is not a bank. It has the power to tax, and all its debts to bondholders are denominated in its own currency. It may end up raising taxes or minting a pile of platinum coins if bondholders get scared, but it will not go belly up due to Federal Direct Loan defaults.

Speaking of which: Yes, student loan defaults will continue to increase. The chart ED issued recently probably conceals many more defaults beyond the two-year cohort it normally tracks. Yes, IBR/ICR will leave ED holding the bag. Yes, legislators will realize this is a severe problem. Whether they simply decide to terminate the student loan programs and leave current debtors to suffer or instead cancel the outstanding student debt is debatable. The latter, whether by direct cancellation or bankruptcy reform, is the preferable and responsible solution as the government should realize it will not get its money back and that there’s an inherent moral conflict between shepherding the public fisc and playing for-profit bank. If the government opts to force student loan repayments in the name of austerity, debtors will respond with a mass default and tax resistance as well. Note that we’re still only talking about Direct Loans, and the outstanding FFELP and private student loans will require additional government action.

While it’s not going to be as significant a financial collapse as the eight trillion dollar housing bubble, the student debt bubble will re-teach the American elite that democracy fails when people believe their government no longer represents them. Americans revolted over taxation without representation; how will they respond to outright peonage to their stubborn government?

Consumer Credit Update (2011 September)

It’s the fifth business day of the month, which means the Federal Reserve has updated its G.19 Release, its estimate of outstanding consumer credit. One problem the U.S. economy faces is that consumer credit is growing faster than the economy. While the G.19 Release doesn’t quantify how much nonrevolving debt is student debt, it is very likely that most increases in that category are attributable to the Direct Loan Program’s student loans because of high tuition and the near impossibility of discharging student debt in bankruptcy. All figures are billions of dollars, and all percentages are annualized. Link here for my ongoing analysis of increasing nonrevolving debt relative to GDP.

This month, the Fed revised the second quarter 2011 numbers. These are seasonally adjusted.

2011 Q1 r 2011 Q2 p 2011 Q2 r
Total 2,421.5 2.2% 2,446.1 bln 4.3% 2,442.5 3.5%
Revolving 792.8 -3.7% 798.3 bln 3.9% 795.9 1.6%
Nonrevolving 1,628.6 5.1% 1,647.8 bln 4.6% 1,646.6 4.4%

It appears the amount of consumer debt didn’t grow as much in Q2 as originally thought. Here’s what we get in July.

2011 Q1 r 2011 July preliminary
Total 2,442.5 3.5% 2,454.5 5.9%
Revolving 795.5 1.6% 792.5 -5.2%
Nonrevolving 1,646.6 4.4% 1,662.0 11.2%

So in July nonrevolving credit increased rapidly while revolving credit contracted again.

As for holdings of nonrevolving debt, government holdings account for nearly all the growth of nonrevolving credit as well as the largest annualized increase. These numbers are not seasonally adjusted and do not sum together; annualized increases are mine.

June (revised) July (preliminary) Numeric Change Annualized Increase
Total NRV 1,636.1 1,652.6 16.5 12.8%
Government 370.1 385.7 15.6 64.1%
Commercial Banks 490.5 491.2 0.7 1.7%
Finance Companies 430.8 432.7 1.9 5.4%
Credit Unions 185.1 186.7 1.6 10.9%
Savings Institutions 36.7 37.0 0.3 10.3%
Nonfinancial Business 44.8 44.7 -0.1 -2.6%
Pools of Securitized Assets 78.2 74.5 -3.7 -44.1%

Increase in government holdings of nonrevolving credit accelerated significantly from June, when it grew at an 18.5% annualized rate. According to the BEA, real economic output grew at a 0.4% in Q1 2011 and 1.3% in Q2.

A Hypothetical Class of 2014 Law Student’s Journey into Debt

[UPDATE: Unpaid interest on IBR does not capitalize onto loan principal. Calculations below are, regrettably, mistaken.]

Recently, Inside the Law School Scam’s LawProf discussed the amount of law school debt a student may expect to take on and provided NALP figures of starting salaries as a comparison. LawProf used some research I provided, and I’m grateful for his linkback to the LSTB. Unfortunately, some of what I sent him was inaccurate due to my own error (esp. how much Stafford Loan borrowing is possible), so I’ve decided to create a detailed hypothetical of law school loan repayment based on current, applicable law. To that end, I taught myself the dark art of loan amortization—something they should teach in junior high school, not that I blame mine. This post will show us how much law school debt a class of 2014 student might reasonably take on given a few assumptions. They are:

  1. No undergraduate debt (ha!)
  2. No scholarships
  3. No savings, job, income, work-study, family connections, etc.
  4. Full-time status maintained throughout law school and graduation within three years
  5. Eligibility for all relevant loans
  6. Attendance at New York Law School. Why? Not to beat up on it, but because its tuition guarantee program removes the tuition increase variable from the calculation. Indeed, I freely admit that NYLS’s unusually high price tag and high cost of living skew the results towards significantly more debt than a typical 1L will start taking on this year. That said, accuracy is important to this project, and as you’ll soon see, the interest and repayment rates are so high that it doesn’t really matter.
  7. Interest accrues monthly, which in reality is not true. Interest on student loans actually accrues daily, but it won’t cause too much inaccuracy in the hypothetical.
  8. …And every other common sense assumption required to make this work.

Law students are eligible for three types of loans: Subsidized Stafford Loans, Unsubsidized Stafford Loans, and Grad PLUS Loans (for professional students). Subsidized Stafford Loans are limited to $8,500 per year, though this will change next year when provisions of the Debt Ceiling Bill go into effect and make law students ineligible for Subsidized Stafford Loans. Unsubsidized Stafford Loans cover an additional $12,000 of tuition, up to $20,500 total. Both types of loans have an annual interest rate of 6.8% and a fee of 1.0%, which is taken out of the loan at the time of origination. Interest does not accrue on Subsidized Stafford Loans while the student is enrolled at least part-time. Unsubsidized Stafford Loans accrue interest immediately. Both loans can be deferred until graduation, after which they are eligible for a six-month grace period during which interest accrues but payments are not demanded. The grace period means that from the time of the last set of disbursements (we’ll assume in August before the 3L year begins and graduation is in May) until repayment first occurs, fifteen months will transpire. This means the grace period ends in the November after graduation, and the first payment will be due in December.

Grad PLUS loans are similar to Unsubsidized Stafford Loans except their annual interest rate is 7.9% and the origination fee is 4.0%. Grad PLUS loans now make it possible for law students to finance not only their full law school tuition minus available Stafford Loans but also to provide for living expenses. The government’s rationale behind this is that professional education is rigorous, so students shouldn’t have to work outside of class. Its heart is in the right place but the results are grotesque.

Because there’s a limit to the amount one can borrow in Stafford Loans each year ($20,500), we’ll go through three scenarios of Grad PLUS Loan borrowing based on how much the student borrows for living expenses: living alone, with family, and not using Grad PLUS loans for living expenses at all. I’ll also include repayment plans except the graduated repayment plan (10 years) and the extended graduate repayment plan (25 years) because I have no idea how to calculate them. You can use ED’s website for that if you are interested. Student debtors are ineligible for extended repayment plans (fixed or graduated) if the principal on their debts is below $30,000, which will pose a problem for the Subsidized Stafford Loans in our example.

I will also give two examples for each scenario placing our graduate on Income-Based Repayment (IBR). IBR calculates a monthly payment based on gross income, family size, total loan principal, their average interest rate, and cost of living. I do not know when the repayment rate is calculated or recalculated each year. After 25 years, the government cancels the loans, leaving the student debtor to pay income tax on the forgiven sum. Thanks to the Health Care and Education Reconciliation Act of 2010, new borrowers in 2014 will have their loans forgiven after only 20 years. I interpret this to mean that people who begin borrowing in 2014 will have the shorter IBR time frame. The government covers interest on subsidized loans for the first three years of repayment if the graduate’s monthly repayment rate does not. I am fairly sure this applies to three years of payments and excludes the grace period. While the monthly payment is partly determined by the average interest rate of all the loans, I believe the payments are distributed among the loans in proportion to the loans’ share of the total remaining principal, and interest on the loans accrues according to their listed rates, not the average.

In the first sub-scenario, our hero will live alone, earn the mythical Biglaw $160,000 starting salary at month zero, and live within the continental United States for cost of living purposes. In the second sub-scenario, our hero will be married to a spouse with no IBR-eligible debt, file jointly, have two children, earn a combined gross income of $70,000 to start, and also live within the continental United States. Yes, I’m assuming the kids will live with their parents for at least 25 years (unless our hero had some combination of two kids and parents living under the same roof over that time period). It won’t save them a whole lot of money, but it is a perverse incentive to keep kids at home just to have cheaper IBR payments.

I will not use IBR’s complementary program, Income Contingent Repayment, which cancels loans after 10 years for graduates who work in the public interest (though income tax on the forgiveness isn’t required). In normal economic times, incomes grow, so I will give our hero a two percent raise every year.

Here’s an outline of what happens to our hero.

I. Grad PLUS Goes to Living Expenses (Alone)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

2. Middle Income ($70,000)

II. Grad PLUS Goes to Living Expenses (w/ Family)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

2. Middle Income ($70,000)

III. Grad PLUS Goes to Tuition Only

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

2. Middle Income ($70,000)

IV. Conclusion

I. Grad PLUS Goes to Living Expenses (Alone)

TUITION YEAR TOTAL SUB’D STAFFORD LOANS TOTAL UNSUB’D STAFFORD LOANS GRAD PLUS (TUITION) GRAD PLUS (LIVING EXPENSES) TOTAL GRAD PLUS LOANS (w/FEES)
$47,800 1L $8,415.00 $11,880.00 $27,505.00 $23,323.00 $48,794.88
$47,800 2L $8,415.00 $32,982.84 $27,505.00 >$23,323.00 >$101,444.56
$47,800 3L $8,415.00 $55,520.67 $27,505.00 >$23,323.00 >$158,253.56
GRACE $8,705.19 $60,431.80 >$174,622.22

*****

YEAR TOTAL
1L $69,089.88
2L >$142,842.40
3L >$222,189.23
GRACE >$243,759.22

A. Standard Repayment Plan: 10 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $174,622.22 7.9% $2,109.43 $78,510.04 $253,132.26
GRAND TOTAL → $243,759.22 $2,905.06 $104,848.78 $348,608.00

B. Extended Repayment Plan (Fixed): 25 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,832.23
GRAD PLUS $174,622.22 7.9% $1,336.22 $226,239.37 $400,861.59
GRAND TOTAL → $243,759.22 $1,855.84 $294,956.14 $538,715.36

C. IBR

1. Biglaw ($160,000)

Here, our hero’s income grows to the point that after nine years of IBR, he or she is kicked into a standard repayment plan. Moreover, the original minimum payment, $1,795, covers the interest on the Subsidized Stafford Loans for the first three years, meaning our hero does not benefit from the government’s IBR interest subsidy.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST TOTAL PAID
$243,759.22 7.35% $1,795.00 – $2,173.03 $233,502.37 $229,099.26 $472,858.47

2. Middle Income ($70,000)

In this scenario, our hero’s family’s income never grows to the point of kicking them off IBR. Consequently, the government saves $1,212.26 by subsidizing the interest on Subsidized Stafford Loan for three years. Nevertheless, the Department of Education stands to lose more than a million dollars by financing our hero’s legal education and living expenses. The term for this? “Negative amortization.”

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST PAID TOTAL PAID
$243,759.22 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00

*****

AMOUNT OF INTEREST SUBSIDIZED REMAINING SUB’D STAFFORD LOAN PRINCIPAL (REMAINING SUB’D STAFFORD LOAN PRINCIPAL W/O SUBSIDY) GOV’T SAVINGS DUE TO 3-YEAR INTEREST SUBSIDY FORGIVEN PRINCIPAL AFTER 25 YEARS TOTAL GOVERNMENT LOSSES
$1,212.26 $27,074.69 ($31,174.55) $2,887.60 $1,063,628.12 $1,064,840.39

II. Grad PLUS Goes to Living Expenses (w/ Family)

TUITION YEAR TOTAL SUB’D STAFFORD LOANS TOTAL UNSUB’D STAFFORD LOANS GRAD PLUS (TUITION) GRAD PLUS (LIVING EXPENSES) TOTAL GRAD PLUS LOANS (w/FEES)
$47,800 1L $8,415.00 $11,880.00 $27,505.00 $10,474.00 $36,459.84
$47,800 2L $8,415.00 $32,982.84 $27,505.00 >$10,474.00 >$75,800.01
$47,800 3L $8,415.00 $55,520.67 $27,505.00 >$10,474.00 >$118,248.05
GRACE $8,705.19 $60,431.80 >$130,478.82

*****

YEAR TOTAL
1L $56,754.84
2L >$117,197.85
3L >$182,183.72
GRACE >$199,615.81

A. Standard Repayment Plan: 10 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $130,478.82 7.9% $1,576.18 $58,663.15 $189,141.96
GRAND TOTAL → $199,615.81 $2,371.81 $85,001.90 $284,617.70

B. Extended Repayment Plan (Fixed): 25 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,832.23
GRAD PLUS $130,478.82 7.9% $998.43 $169,048.72 $299,527.53
GRAND TOTAL → $199,615.81 $1,518.05 $437,381.30 $237,765.49

C. IBR

1. Biglaw ($160,000)

Same results as I.C.1., except this time, our hero’s lower starting debt level means that he or she will be kicked off IBR after only four years.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST TOTAL PAID
$199,615.81 7.35% $1,795.00 – $1,973.63 $211,299.27 $126,412.61 $326,028.42

2. Middle Income ($70,000)

Readers will note that our hero pays the exact same amount living with family as living alone, though the government still loses three quarters of a million dollars.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST PAID TOTAL PAID
$199,615.81 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00

*****

AMOUNT OF INTEREST SUBSIDIZED REMAINING SUB’D STAFFORD LOAN PRINCIPAL (REMAINING SUB’D STAFFORD LOAN PRINCIPAL W/O SUBSIDY) GOV’T SAVINGS DUE TO 3-YEAR INTEREST SUBSIDY FORGIVEN PRINCIPAL AFTER 25 YEARS TOTAL GOVERNMENT LOSSES
$1,081.86 $24,168.33 ($27,445.98) $2,195.79 $753,381.79 $754,463.64

III. Grad PLUS Goes to Tuition Only

TUITION YEAR TOTAL SUB’D STAFFORD LOANS TOTAL UNSUB’D STAFFORD LOANS GRAD PLUS (TUITION) GRAD PLUS (LIVING EXPENSES) TOTAL GRAD PLUS LOANS (w/FEES)
$47,800 1L $8,415.00 $11,880.00 $27,505.00 $0.00 $28,651.04
$47,800 2L $8,415.00 $32,982.84 $27,505.00 $0.00 >$59,565.52
$47,800 3L $8,415.00 $55,520.67 $27,505.00 $0.00 >$92,922.23
GRACE $8,705.19 $60,431.80 >$102,533.47

*****

YEAR TOTAL
1L $48,946.04
2L >$100,963.36
3L >$156,857.91
GRACE >$171,670.47

A. Standard Repayment Plan: 10 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $102,533.47 7.9% $1,238.60 $46,099.02 $148,632.49
GRAND TOTAL → $171,640.47 $2,034.23 $72,437.77 $244,108.23

B. Extended Repayment Plan (Fixed): 25 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,823.23
GRAD PLUS $102,533.47 7.9% $784.59 $132,843.24 $235,376.71
GRAND TOTAL → $171,640.47 $1,304.21 $201,560.01 $373,230.48

C. IBR

1. Biglaw ($160,000)

By using Grad PLUS loans for tuition only, our hero is kicked off IBR after only two years.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST TOTAL PAID
$171,640.47 7.35% $1,795.00 – $1,807.50 $203,020.87 $88,649.12 $260,319.58

2. Middle Income ($70,000)

Readers should take note of this scenario because in better economic times and less severe law graduate oversupply, it would probably be the one most similar to graduates from $45k/year law schools on IBR. Again, the graduate pays the exact same amount as if he or she had borrowed the full amount of Grad PLUS Loans. Despite our law graduate’s frugality, the Department of Education will lose more than half a million dollars after 25 years.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST PAID TOTAL PAID
$171,640.47 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00

*****

AMOUNT OF INTEREST SUBSIDIZED REMAINING SUB’D STAFFORD LOAN PRINCIPAL (REMAINING SUB’D STAFFORD LOAN PRINCIPAL W/O SUBSIDY) GOV’T SAVINGS DUE TO 3-YEAR INTEREST SUBSIDY FORGIVEN PRINCIPAL AFTER 25 YEARS TOTAL GOVERNMENT LOSSES
$962.80 $21,441.58  ($24,049.84) $1,645.45 $558,587.96 $559,550.76

IV. Conclusion

I have five points:

(1) Much rending of garments and gnashing of teeth accompanies the notion of 21 year-olds taking on law school debts without understanding their implications. Although law students have only one set of circumstances on which to base their repayment decisions rather than the twelve the hypothetical depicted, I found this particular project unusually difficult, and this comes from a guy who enjoyed doing integration by parts problems in his high school calculus class. In other words, calculating loan repayment plans, total interest, types of loans available, interest on loans in school or after a grace period, subsidized interest for three years on IBR, projected income increases, etc. to within one month of repayment is hard even for adults who don’t blush at math and spreadsheets. At least with cars or mortgages, borrowers already have an income and know what they can afford (to say nothing of at least some bankruptcy protections). However, as I’ve written on several occasions in the past, even if law graduates were required to be implanted with graduate employment tracking chips in the bases of their skulls to receive their diplomas, there is still almost no way a prospective law student can know ex ante what his or her income will be starting out, much less over the course of a law career—except that it’s certain to be far less than what’s necessary to cover a monthly payment on a Standard Repayment Plan. Additionally, the fact that Congress can and does capriciously change the terms of student loans throws a wrench into current students’ borrowing plans.

(2) There is nothing remotely standard about the Standard Repayment Plan. In all three scenarios, our hero was paying at least $2,000 per month. That’s $24,000 per year and would require at least $160,000 in income to constitute only 15% of his or her gross income. Congress and the Department of Education must know that most law graduates do not make this kind of money, yet they allow the lending to go on. How can university administrators not know either? It shocks my conscience. Even without using Grad PLUS loans for living expenses, an NYLS 1L can expect to cough up $1,304.21 each month (15% of a $104,338.40 salary) for 25 years on an extended repayment plan, which at least will be somewhat eroded with 25 years of inflation.

(3) It occurred to me that Grad PLUS loans are the government’s way of trying to help grad and professional students avoid taking on private loans. The changes to the bankruptcy law made private student loans death traps in 2005, and Grad PLUS loans came into being soon afterwards. It may’ve been part of the BAPCPA too, but it only just now occurred to me. As you can see with green blobs on the graphs, Grad PLUS loans were by far the largest component of law school debt. Not as bad as private loans, but certainly not as good as the lower interest Staffords.

(4) The most surprising thing I found is that unless a law graduate gets a Biglaw starting salary—which I believe will soon deflate rapidly—how much they borrow ultimately won’t matter. Once a fledging lawyer’s initial salary fails to produce a payment that covers the monthly interest, he or she might as well have borrowed as much money from the government as possible and spent it. That’s not to say I condone it, and I absolutely discourage people from taking on this kind of debt just because IBR exists. Not only does Congress flip-flop on student lending laws, but borrowing that kind of money is simply irresponsible for those who know better. The moral hazard IBR creates is even worse than I imagined.

(5) Speaking of which, don’t get me wrong, IBR is far better than loan repayment without it. Although, once a lawyer fails to make Biglaw or a Biglaw salary, the government has already made a bad loan. What does all this mean exactly? Not that the government literally spends an extra million dollars on high-cost law degrees when it cancels their debts but that it could’ve spent that money on something more practical. Under the current system, the Department of Education stands to lose roughly one billion dollars per 1,000 to 2,000 law students who attend law schools charging $45,000 in tuition per graduating class when the loans are canceled. As I wrote at the beginning, using NYLS’s tuition guarantee program does mean using a law school whose tuition is unusually high, just outside the first standard deviation of average private law school tuition, so in hindsight it’s not the best case for broad analysis, even if the purpose of the hypothetical is accuracy. However, the tuition bubble pauses for no one, even when incoming enrollments are dropping, and today’s second standard deviation will be the average in four years according to my projections. As a footnote, law schools charging what is now below average private school tuition, $35,000 per year, cost the government one billion dollars in “middle income” IBR cancellations per 4,500 to 5,000 students per graduating class, and yes, the law graduate will still pay the same $211,380 as everyone else.

While these analysis didn’t account for inflation and increased income tax revenue from lawyers, if any, legal education will cost the republic tens of billions of dollars for far less value than it provides.

Consumer Credit Update (2011 August)

It’s the fifth business day of the month, which means the Federal Reserve has updated its G.19 Release, its estimate of outstanding consumer credit. One problem the U.S. economy faces is that consumer credit is growing faster than the economy. While the G.19 Release doesn’t quantify how much nonrevolving debt is student debt, it is very likely that most increases in that category are attributable to student loans because of the near impossibility of discharging them in bankruptcy. Link here for my analysis of increasing nonrevolving debt relative to GDP.

This month, the Fed provides us with preliminary second quarter 2011 numbers. These are seasonally adjusted.

2010 Q1 r 2011 Q1 r 2011 Q2 p
Total $2,421.9 bln 2.4% $2,419.9 bln 2.1% $2,446.1 bln 4.3%
Revolving $791.1 bln -4.8% $790.6 bln -5.0% $798.3 bln 3.9%
Nonrevolving $1,630.9 bln 6.0% $1,629.2 bln 5.6% $1,647.8 bln 4.6%

Q2 is more a story of credit card debt. Here are the June numbers.

 2011 April r 2011 May r 2011 June p
Total $2,425.5 bln 2.8% $2,430.6 bln 2.5% $2,446.1 bln 7.7%
Revolving $789.8 bln -1.3% $793.1 bln 5.0% $798.3 bln 7.9%
Nonrevolving $1,635.8 bln 4.8% $1,637.5 bln 1.3% $1,647.8 bln 7.6%

Yikes. June was a bad month for consumer credit growth. Here’s the non-seasonally adjusted numbers by holder in billions of dollars. We find that government holdings drive growth, accounting for most of the net increase.

May (revised) June (preliminary) Numeric Change Annualized Increase
Total NRV $1,629.7 $1,637.6 $7.9 6.0%
Government $364.9 $370.1 $5.2 18.5%
Commercial Banks $487.5 $490.4 $2.9 7.4%
Finance Companies $430.0 $431.2 $1.2 3.4%
Credit Unions $185.8 $184.9 -$0.9 -5.7%
Savings Institutions $37.0 $37.0 $0.0 0.0%
Nonfinancial Business $44.7 $44.9 $0.2 5.5%
Pools of Securitized Assets $79.7 $79.2 -$0.5 -7.3%

Increase in government holdings of nonrevolving credit decelerated slightly from May, when it grew at a 20.0% annualized rate, and in Q2 it increased at a 17.9% annualized rate, which is a lot better than Q1’s 58.8% rate. According to the BEA, real economic output grew at a 0.4% annualized rate in Q1 2011, and 1.3% in Q2.

Consumer Credit Update (2011 July)

It’s the fifth business day of the month, which means the Federal Reserve has updated its G.19 Release, its estimate of outstanding consumer credit. One problem the U.S. economy faces is that consumer credit is growing faster than the economy. While the G.19 Release doesn’t quantify how much nonrevolving debt is student debt, it is very likely that most increases in that category are attributable to student loans because of the near impossibility of discharging them in bankruptcy. Link here for my analysis of increasing nonrevolving debt relative to GDP.

First quarter 2011 numbers have been revised again.

2010 Q4 2011 Q1 r 2011 Q1 r
Total $2,407.3 bln 2.1% $2,421.9 bln 2.4% $2,421.4 bln 2.3%
Revolving $800.6 bln -3.1% $791.1 bln -4.8% $790.6 bln -5.0%
Nonrevolving $1,606.7 bln 4.7% $1,630.9 bln 6.0% $1,630.8 bln 6.0%

Here’s what we get in May.

2011 Q1 r 2011 April r 2011 May p
Total $2,421.4 bln 2.3% $2,427.1 bln 2.8 $2,432.2 bln 2.5%
Revolving $790.6 bln -5.0% $789.8 bln -1.3 $793.1 bln 5.1%
Nonrevolving $1,630.8 bln 6.0% $1,637.3 bln 4.8 $1,639.1 bln 1.3%

Superficially, it appears credit card debt is the story for May. Nonrevolving debt saw a net increase of $1.8 billion, but this conceals much.

As for holdings of nonrevolving debt, which differs from the top portion of the release because it is not seasonally adjusted, finance companies lost $3.3 billion but everyone else added a total of $7 billion. Of that increase, $5.5 billion (79%) belonged to the federal government.

April (revised) May (preliminary) Annualized Increase
Government $359.4 bln $364.9 bln 20.0%

It appears growth of government nonrevolving debt accelerated in May, for in April it was only 15.1%.

Contrast all this with the BLS’s Employment Situation release, which reported a net growth of 54,000 jobs in May 2011.The BLS issued the June release today as well, which saw only 22,000 nonfarm payroll jobs added.

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