If the market collapse of 2007-2009 demonstrated anything, it is that leveraged strategies have the potential to bring about significant losses. In the years leading up to that crisis, banks and other financial institutions made unwise home loans to improvident borrowers. In the years afterwards, the banks had to make large write-offs of the nonperforming loans that they had accumulated on their balance sheets, while millions of homeowners foreclosed on their homes, 2.9 million in the peak year of 2010 alone. Millions more had stopped making payments on their homes. The banks simply couldn’t foreclose quickly enough; eventually, it was the combination of foreclosures, bank write-offs, and recovery time that got us through that crisis.
I thought of that as I saw fresh data from the Federal Reserve (via MarketWatch) showing that student loans now top $1.5 trillion. Meanwhile, credit card debt has surpassed $1 trillion. I’m sure I’m not alone in feeling something is very wrong with that picture. About 173 million Americans have credit cards; I’m not sure how many carry a balance, but if it’s half that figure, then more than 86 million Americans are making use of revolving credit, which is more than four times the number of Americans attending college at any one time. Obviously, this tells us what we already know – that college costs a lot more than a year’s worth of groceries and Starbucks runs.
Nevertheless, this strikes me as a financial crisis in the making, not dissimilar from the housing crisis I opened with. Sure, the average home costs more than a university degree, but you can at least foreclose on a home – there’s a tangible asset there. What happens if, following the next recession, millions of college grads stop making payments on their student loans? Delinquencies are already high now, close to one out of five borrowers. Banks and hedge funds were able to purchase foreclosed homes and turn them into rental units, something that obviously can’t be done here.
$1.5 trillion is a lot smaller than the foreclosure market was a decade ago, but it’s not chopped liver and besides, non-repayment of debt is socially corrosive. Time will tell how we’ll manage student loan defaults of the future, but for now, it is incumbent on students and their parents to eschew excessive levels of loan debt. Higher education has become an industry – one that has managed to position itself as a basic need, to be had at nearly any cost, lest one forgo a lifetime of high pay. But it is not, if it ever was, the degree that generates high pay but the ambition and effort of the student. As with any other purchase, it behooves us to consider the benefit we can reasonably expect from the cost of the item, finding cheaper alternatives if need be, or ratcheting up our efforts to make it all worthwhile.
Please share your thoughts in our comments section. Meanwhile, below please find links to other advisor-related content on today's Seeking Alpha. Also, Seeking Alpha has added podcasts to its repertoire – from me and others; for a weekly “best of” digest, follow SA Multimedia; you can also follow my feed on iTunes.
- Invesco US’s education strategies director shares college savings lessons learned from his mom.
- James Picerno is tracking the endless stream of botched recession predictions.
- Eric Basmajian: How the Iran deal withdrawal will impact consumers.
- Mark J. Perry maps the extraordinary productivity of the U.S. economy.
- For more content geared to FAs, visit the Financial Advisor Center.