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May 25, 2018 | Debt Slaves, Part 1: Million Dollar Student Loans And The Coming Bailout

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with, he currently writes for CFA Magazine.

Today’s Wall Street Journal is profiling an orthodontist who has $1 million in student loans, is paying less than the interest that’s accruing, and because of this will owe $2 million in the not too distant future.

The list of things that have to happen for a situation like this to evolve is long and improbable. But apparently less so all the time. The Journal reports that 100 other Americans are now in similar straits, up from 14 five years ago.

For some reason dental school is especially pricey, but tuition continues to rise pretty much across the board, thus saddling at least one generation with debts that in the aggregate now total about $1.5 trillion.

Some stats of note, courtesy of the StudentLoanHero website:

• $1.48 trillion in total U.S. student loan debt
• 44.2 million Americans with student loan debt
• Student loan delinquency rate of 11.2% (90+ days delinquent or in default)
• Average monthly student loan payment (for borrower aged 20 to 30 years): $351
• Median monthly student loan payment (for borrower aged 20 to 30 years): $203

And here’s a chart with a couple of important features. Note that grad students are the ones doing the most aggressive borrowing, with parents not that far behind. Which means two things: First, the brightest among us, who are going on for advanced degrees, are the ones being saddled with the most outrageous debts. Second, parents are also ramping up their borrowing, so the earlier assertion that student debt was encumbering “one generation” was false – it’s encumbering every generation as families share the burden.

student loans debt slaves

The take-away? Student loans are not a borrower-specific problem but a societal one because – as always – when a sector’s debt reaches a certain point the old adage “borrow $100 dollars and it’s your problem, borrow a million and it’s your bank’s problem” becomes relevant.

When the mortgage market blew up in 2007 the problem moved from homeowners to banks to everyone via the government bailout of the industry. With student loans the magnitude of the problem is approaching the same kind of breaking point, where a large enough segment of borrowers simply can’t manage and the resolution shifts from them to taxpayers. Note the double-digit default rate during a period of economic expansion. In the next recession expect a doubling or more of the number of former students who just give up and (metaphorically) pop their house keys into the mailbox.

To illustrate what a rock-solid prediction this is, consider this from the Wall Street Journal’s dentist profile:

The USC education helped Mr. Meru earn $225,000 last year working for a corporate practice in Draper, Utah, 20 minutes from Salt Lake City. That compares with a $158,000 median income for dentists, according to the Labor Department…

After living with his parents for 15 months, Mr. Meru and his wife moved to a one-bedroom apartment in Los Angeles with a monthly rent of $1,550. When Mrs. Meru became pregnant in 2010, the couple paid $1,800 for a two-bedroom.

One luxury was buying a used Mercedes-Benz, which carried a monthly payment of $390. Beyond that, Mr. Meru said, the couple restrained their spending. For fun, they went camping.

How long will someone earning $200,000+ be willing to live as a debt slave, renting an apartment, driving a used car and otherwise “restraining their spending” in this way, especially when patients get scarce in the next recession? Not long.

At that point it becomes politically impossible to cut these borrowers loose and allow them to fail en masse. As with Fannie Mae and Freddie Mac, the only alternative will be to just add those loans to the federal government’s debt.

Which brings us to the perennial and tiresom question of whether the system at that point simply shrugs and keeps going or finally recognizes the futility of an ever-rising pile of debt financed with an ever-increasing supply of unbacked fiat currency.

The prediction-fatigue that has set in among doomsayers and their (our) audience makes it pointless to claim that “this is the straw that breaks the camel’s back,” since the camel should have died years ago and yet somehow is still wandering around. The student loan bailout is just one more thing on a very long list.

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May 25th, 2018

Posted In: Dollar

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