Student-Loan Debt Creating Systemic Risk

Friday, 01 Mar 2013 11:17 AM

By Barton Webster

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While Americans have deleveraged in most consumer markets, student debt last year surged to a record, with more than a third of student-loan borrowers under 30 three months late on their payments.

“We are not a deadbeat nation," President Barack Obama said during the debt-ceiling battle. Yet, student-loan defaults are spiking to historic highs, The Wall Street Journal says in an op-ed.

The Federal Reserve Bank of New York reported this week that 35 percent of student-loan borrowers under 30 were at least 90 days late on their payments at the end of 2012, up from 26 percent in 2008 and 21 percent in 2004.

Editor's Note:
Economist Warns: 50% Unemployment, 100% Inflation Possible

And those numbers exclude young people not yet required to make payment. As they enter the labor market, more and more are finding they cannot find a job that nets them enough to repay their school debt.

U.S. student-loan debt increased 11 percent last year to $966 billion and has exploded 51 percent since 2008, the New York Fed report showed. In addition, 43 percent of 25 year olds had student debt in the fourth quarter of 2012, up from about 33 percent in the same period of 2008.

That bill will likely be pushed onto taxpayers. The Department of Education is now the originator of about 90 percent of student loans, thanks to a provision that was passed together with the Affordable Care Act of 2010, The Journal reported. The provision was presented as a big cost saver, although the Congressional Budget Office admits the provision’s accounting minimizes the cost of defaults.

Obama has worked to push laws that provide opportunities to delay or avoid honoring school debt, such as “income-based repayment” plans and long-term debt forgiveness for people who take government and non-profit jobs.

The New York Fed also says that borrowers behind on student loan payments are more likely to be delinquent on auto loan, credit card and mortgage payments.

If this isn’t creating systemic risk, what is?

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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