Student Loans: One Piece of a Much Scarier Puzzle

As we make our way toward the 2012 election, the range of social and economic issues coming to the political forefront can seem daunting. Though not always a focus of political discourse in the media, one of the most daunting issues is that of student loans. In January I asked, "Are student loans going to make for one of the biggest economic issues this year?" In light of unemployment and rising college tuition costs, the issue of student loans is most likely not going anywhere anytime soon. To say the least, the issue of student loans appears to be becoming a ball and chain for younger Americans, and the phenomenon could very well become a serious problem for both political parties given the topic's respective social and economic implications.

I still maintain that student loans are going to be a crucial topic in the American political discourse as we make our way to November. Owing to ongoing developments with the American economy and higher education, the issue of student loans may become impossible to avoid. Nevertheless, students loans remain only one piece of a much bigger and much scarier economic puzzle. As such, there appear to be additional factors to take into account.

Marketplace's Nancy Marshall-Genzer had an interesting report on Tuesday regarding student loan debt and its effects on younger Americans. Marshall-Genzer: "Today's new college grads are so burdened with student loan debt, they're putting off key life decisions." Students who are saddled with debt may be delaying rites of passage such as getting married, having children, and purchasing a home.

Marshall-Genzer's report suggested that student loan debt would lead to a significant drop in aggregate demand. From the report: "The furniture store sells fewer futons; electronic stores don't sell as many TVs. The ripples from student debt swelled to a tsunami when they hit the housing market." Rick Palacios, a senior research analyst at John Burns Real Estate Consulting, noted that whereas in 2009, 50 percent of all existing home sales were to first-time home-buyers, that figure today is now at near 30 percent. Marshall-Genzer also added that "even if new, debt-laden grads [want] to buy a new home ... they may not qualify for a loan."

Whereas college can appear to be a cultural necessity in terms of securing employment, the fact that student loan debt has surpassed total credit card debt should give American society cause for concern. In light of students' being saddled with college debt, the New York Fed has said that "as many as 27 percent of student loan borrowers are delinquent." And even further, in this economy there are no guarantees that one with a college degree will be able to find a good job even after he or she graduates.

In an ominous article posted on Zero Hedge on March 6, 2012, Michael Snyder discussed "15 potentially massive threats to the US economy over the next 12 months." Snyder: "We live in a world that is becoming increasingly unstable, and the potential for an event that could cause 'sudden change' to the US economy is greater than ever... A war in the Middle East, a financial collapse in Europe, a major derivatives crisis or a horrific natural disaster could all change our economic situation very rapidly." Interestingly enough, Snyder ranked the "Student Loan Debt Bubble" as number 6, right under number 4 "An Economic Collapse In Spain" and number 5 "the Price Of Gasoline".

Snyder's commentary was dire: "Just like we saw with the housing bubble, the student loan debt bubble just continues to grow and grow and grow." Snyder continued, "At some point the nearly 1 trillion dollar bubble is going to burst. What effect will it have on our financial system when that finally happens?"

In a similar line of thought on Zero Hedge, Wolf Richter discussed on March 6, 2012 how tuition increases are leading to more student protests and more mass arrests. Richter: "[The students'] problem: tuition increases. Already, tuition in California's state schools has tripled over the last decade, and state budget cuts will induce universities to jack up tuition again. But the state is out of money."

Commenting on the New York Fed's report on how tuition increases in the US are leading to "ballooning student loan balances that are increasingly difficult to bear", Richter noted that the average balance of student loan debt is now $23,000; "that includes the millions of student loans that, after years of payment, have much smaller balances or are nearly paid off." As such, the student loan balances of "recent graduates are much higher."

Richter commented that whereas Pres. Obama's efforts to ease the student loan burden are "laudable", the issue of student loan debt is related to problems inherent within the system itself. Among reasons for student loan problems, Richter discussed how students feel mandated to take on debt in order to secure a decent occupation. Even further, "the student-loan industry profits from processing student loans" and encourages students to go into further debt; "risk is transferred to the taxpayer who guarantees the loans."

Richter's analysis suggested that the government continues to play into problems related to student loans. Richter: "The government...will fund and guarantee whatever it takes to allow students to get their education regardless of how reckless tuition and fee increases are." While universities lack incentives to lower tuition costs, Richter noted that student protests seem to be the only "price pressures on universities." In the end, "the system needs to be restructured, either by opening it up to competition or by exposing it to effective checks and balances." According to Richter, our current situation portends that an entire generation may find itself bankrupt.

Zero Hedge's contributors have done well in keeping the issue of student loans fresh in readers' minds. Whereas the student loan bubble seems to be creating "a generation of wage slavery", there appear to be no easy answers to the dilemma. In October 2011, Zero Hedge's Tyler Durden noted, "Granted, unlike the mortgage bubble collapse, this time we know...that everyone is on the fraud... Debtors know it's a bubble, lenders know it's a bubble, everyone knows it's a bubble, yet it is growing faster now than ever before."

In the book "Crisis Economics" written by Nouriel Roubini and Stephen Mihm, the authors discussed that financial "crises are creatures of habit" and that "most crises begin with a bubble, in which the price of a particular asset rises far above its underlying fundamental value." This appears to be the case with student loans, as graduates saddled with debt are having a difficult time finding meaningful labor in a harsh job market. Roubini and Mihm continued that bubbles "often [go] hand in hand with an excessive accumulation of debt, as investors borrow money to buy into the boom... Asset bubbles are often associated with an excessive growth in the supply of credit."

Roubini and Mihm discussed that usually with financial bubbles, "when confronted with the evidence of previous busts, [optimists] claim, 'This time is different.'" What is odd regarding the student loan bubble is that observers can see that a bubble is at hand, and yet the bubble persists. The authors' analysis later continued, "At some point, the bubble stops growing ... borrowing becomes harder... When the boom becomes a bust, the results are also predictable." More ominously, as supplies begin to outstrip demand and prices fall, "panic ensues, and just as prices exceeded their fundamental value during the bubble, prices fall well below their fundamental values during the bust." In other words, tuition costs may plummet in the not-so-distant future...potentially bringing down the entire higher education system in the US with them. Universities may have to cut academic programs and lay off professors in the aftermath of the bubble's bursting.

The current student loan phenomenon appears to be a textbook bubble; it is clear, yet at this point, it's as if very few want to address the matter. To be fair, finding solutions to the student loan issue seems to be as politically and economically sensitive as the nature of the issue itself. Interestingly, according to the Consumer Financial Protection Bureau's website, the agency's "student loan complaint system is open for business." (Even then though, I am reminded me of an adage my father would say growing up: "Nobody likes a whiner.") I am not too certain that complaints will really help to find solutions to the student loan issue. That being said, maybe complaints are a good start.

Per the discussions on Zero Hedge, one has to wonder if the student loan bubble threatens the entire financial system. Even if that is the case, I do not see anything regarding the student loan issue on the main page of the Financial Stability Oversight Council's website. The FSOC was set up to identify and monitor risks to the US financial system inside and outside of the financial system; the FSOC is supposed to assist in identifying emerging risks to financial systemic stability. On the FSOC's main page, there is mention of the "debt limit", "housing finance reform", "Wall Street reform", and even "China strategic and economic dialogue", but nothing on student loans.

Viewing the student loan issue in light of all the other ongoing financial issues in the US and the world reflects the fact that the student loan bubble is only one piece of a much larger precarious puzzle of global finance. In light of Michael Snyder's "15 potentially massive threats to the US economy", we now have a list of various geopolitical and economic factors that portend rough times ahead: a perfect storm. Both numbers 1 and 2 on Snyder's list include the issue of a regional war in the Middle East. Numbers 3 and 4 deal with Eurozone issues. Number 5 is gas prices. Number 6 is student loans, but interestingly enough, number 7 is a possible "state and local government debt crisis" as "cities all over the country...are on the verge of bankruptcy". Given the recent protests in California with Occupy Education with protesters chanting, "They say cut back, we say fight back", the issues of state budgets, student loans, and higher education costs appear to be interconnected.

One interesting thing about the student loan issue is that it is tied to generational differences in the populace. With this in mind, we may very well be seeing more and more student protests in the future. If younger Americans begin to view the American electoral process as being irrelevant or indifferent to the issues that affect them with "more than two-thirds of them [thinking] the government is broken", such student protests would appear to be the only practical avenue of bringing the issue to the forefront of the political discourse in the US.

At the end of the day, we have to remember that student loan debt remains only one piece of a larger puzzle that portends a "perfect storm" on a global level in the near future. In light of this perfect storm, it is as if global finance is starting to spill into eschatology; "doomsday" has become an everyday socio-economic theme in political and financial discourse. From this perspective, one has to wonder exactly what other forces are at work with respect to this historically-convenient global perfect storm, but that is a topic for another day...