There Is No Foreclosure Crisis, on Average

Let there be contrarianism!

Tami Luhby, “There is no student loan ‘crisis’,” in CNN Money (“Debunking the Student Loan Crisis,” in the banner).

[T]here’s no need to panic. Most borrowers have a reasonable amount of debt, and the total balance is not likely to cause major damage to the economy like the mortgage crisis did, experts say … But all the talk of a crisis or bubble in the student loan industry is exaggerated, experts say.

CNN Money isn’t running this piece to participate in an academic discussion about what is and isn’t a bubble (much less defining “crisis”). The article’s real title is, “Here’s why you, above-water middle-income American, don’t need to give a shit about other people’s problems and can feel secure scolding protesters.” Indeed, according to CoreLogic’s “Negative Equity Report,” only 11.1 million homeowners were underwater on their mortgages (22.8 percent) late last year, and that’s only for mortgaged homes. We might just as easily say that’s not a crisis based on the same sophistry: “Most homeowners have a reasonable amount of debt, and the total balance isn’t likely to damage the economy (anymore than it already has). All the talk of a foreclosure crisis is exaggerated.” Yet, homeowners just got a paltry $26 billion principal write-down.

The only point Luhby’s experts are disputing here is whether student debt will wreck the financial system, but one doesn’t need to know how much debt there is, nor even the post-graduate default rate, to realize that since most loans are guaranteed or held by the federal government that of course it can’t wreck the financial system. If taxpayers had pre-TARPed every mortgage starting in 2004 then Bear Stearns and Lehman Bros. would still walk among us, yet we’d still have just as many foreclosures. The problem would be when the government realized that it lost a fortune subsidizing wealthy bankers, just as it will when it realizes it’s subsidized university administrators with Direct Loans and IBR.

If we were having an academic discussion, we’d acknowledge that debt bubbles are problems from debtors’ perspectives. No one who has an underwater mortgage gives a crap if their bank fails and ends up getting bailed out or nationalized. They give a crap about their underwater mortgages. Likewise, the problem facing college-educated Americans is that many of their degrees are underwater; or worse, they’re “radioactive” in the sense that the knowledge and skills (and signaling value) that came with the degrees decays into nothingness without gainful employment. (Note that this excludes the millions of people who never graduated.) By contrast the owner of an underwater mortgage has the same amount of house as before.

Curiously, Luhby then lists several convincing reasons why we should think student debt is a crisis, e.g. growing from $600 billion to $1 trillion in five years. If I were an economist—and I’m not, I just play one on the Internet—I’d wonder what the payoff will be. Will GDP grow significantly due to these newly educated atomic super-workers? If the benefits of mass higher education are so obvious, why didn’t we make this investment earlier?

“But workers with bachelor’s degrees earn about $650,000 more over their lifetime than their peers who only have high school diplomas, a recent Pew Research Center analysis found.”

Oh God, not the Pew Research Center’s “Is College Worth It?” Readers might recall my head exploding at its J.D.-professional degree composition fallacy.

The Pew paper doesn’t serve Luhby well here. Take footnote 18:

The future earnings of a young worker today are not known with certainty. The estimates in this report are the amounts that young workers will earn over their working lives if they are paid in the same manner as older workers are paid today. [Emphasis LSTB]

Let this be the lesson for 21st century applicants: Education pays … if it pays, and only when it pays.

If it pays: Take, for instance, the American Community Survey’s (ACS) 2010 1-Year Estimate of median earnings by Educational Attainment (S1501). The median earnings for a high school graduate were $26,349, for a bachelor’s holder, $47,422, and for a graduate/professional, $62,618. This sounds great, but the survey excludes anyone who has no “earnings,” so those who are unemployed, homemakers, boomerang children, in the military, incarcerated, or retired aren’t counted against that median figure. These omissions pull the true median down (I’d still exclude retirees and probably prisoners).

When it pays: When tuition goes up and wages go down, graduates won’t earn what older workers do. Additionally, Pew doesn’t say if it includes interest on student loan debt. Even though it acknowledges that higher education doesn’t pay off for everyone, particularly those with liberal arts degrees—well wait, isn’t the whole point of this discussion? Aren’t we concerned that people who are below the true median received a subsidized education (if they even finished it) and have little to show for it? We’re back to this “most mortgages are in good standing and will be paid, so there is no foreclosure crisis—except if you live in Las Vegas.”

Yet Luhby acknowledges this.

The unemployment rate for those age 16 to 24 with bachelor’s degrees stood at 8.1% in February, up from 4.6% four years earlier. Many others find themselves underemployed.

I dug up the February non-seasonally adjusted employment data on sub-24-year-olds from the BLS that she’s citing. We can’t compare it to other months because the BLS doesn’t post those numbers, but if you look, you’ll find that while 171,000 unemployed people out of 2,110,000 in the labor force is an 8.1 percent rate, it excludes the 155,000 who aren’t in the labor force at all. 326,000 out of a population of 2,265,000 is 14.3 percent unemployed or not in the labor force. It’s not too much of a stretch to assume that people under 25 actually want to enter the workforce and use their college degrees.

There is no V-shaped recovery coming, and those who’ve graduated into debt and retail jobs will compete with more recent graduates for college-y jobs.

It’s an economic investment,” said Sarah Turner, professor of economic and education at the University of Virginia, Charlottesville. “It’s not going to work for everyone, but on average, it has a high return. [’s Mark] Kantrowitz expects defaults to climb for another year, before starting to decline. That’s because the economy is slowly strengthening and unemployment rates are coming down.

Again, we don’t care about the “average investor,” or even the median one. We care about what happens to those who get a low or negative return, and who should pay the consequences. As for the unemployment rate, we also need to worry about wages and people falling out of the workforce entirely. These aren’t captured in the unemployment rate.

This is why college graduates are protesting on the streets. Student debt is their crisis, even if the public shields lenders from the bubble.



  1. On the Pew research, they have issues with causation vs correlation, but the stats can be useful to describe what has already transpired.

    Problem is that info is so current today people want the impossible: they want to predict the future.

    Well here is a future prediction. Que the NBC jingle…..”The more you know….”

    Matching appropriate debt with future income potential is the holy grail of student lending

    Lending will never disappear, but it can be improved to avoid bad choices.

    The schools are not changing their game plan on their own.

    The only thing that will work is “turning off the faucet” of federal funding, or at least reducing it to a smaller stream.

    Allow the market to price loans at what they are worth.

    Cut off the guarantee of approval for all people without a credit check in Fed loans.

    The guy who can artfully explain to student’s from poor families that this is for their own good while still being able to keep themselves in office with votes will be quite the politician.

    Yes, I am saying a political sacrifice is necessary for systemic change.

  2. For people who took sailing lessons vs. those who did not, I suspect we’d find the same thing.

    Also, the most critical stat I have seen lately is the IHEP default study, which found an overall 15% default rate for 2005 grads. This points to a true, lifetime default rate of at least double that, more likely it is pushing 40%

  3. Matt, I was reading Superfreakonimics, and stumbled upon this:

    “If you took all men and women, you would find that the average person has one breast and one testicle. But how many people fit that description?”

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