What's Dragging Down the Economy?

Americans were quickly scalded by overheated mortgages, and we learned our lesson. Combined, outstanding mortgage debt and home equity lines of credit shrank more than $130 billion in the past quarter. However, Americans now sit in a pot that will start to boil over, and we might be cooked before we notice the heat. Student debt numbers continue to get worse, and this will hamper America's future prosperity.

The student loan picture
The easiest way to grasp the current state of student loans is through two charts. This first chart shows total debt by type. Note that student loans grow from one of the smallest types to the second-largest in less than a decade:

This second chart shows delinquencies by loan type. Delinquency rates have steadily increased over the past decade, perhaps with the rise of underperforming for-profit schools:

The New York Fed links the latest spike of more than 11% -- much higher than the worst delinquency rates of the mortgage market -- to "previously defaulted student loans that have been updated on credit reports this quarter." Because student loans cannot be defaulted on, ones previously written off have been counted again, adding $19 billion in delinquent debt and pushing up the past-due rates.

While this explanation might ease some minds because it means better credit reports and stronger financial positions to pay off the loans, it also represents the drag these loans will have on the economy because of their special quality: Student loans cannot be discharged through bankruptcy. As the largest lender -- the government -- takes its interest and principal from past students who are finally in stronger financial shape, there will be less money for other personal investments, from cars to homes to iPhones to retirement.

The bigger questions
This leads to the discussion of whether the government should provide these loans, whether students should take them, and why schooling costs have risen so rapidly.

The government should provide subsidized loans. It allows those who wouldn't have the resources to earn higher degrees, which are extremely important in finding employment and maintaining a stable social structure. Take a look at the difference in unemployment between those with bachelor's degrees and those with no college:

Unfortunately, students might have no choice but to take these loans, given the above picture. This turns the attention toward school costs. One cause of rising school costs is simply greater demand. According to the National Center for Education Statistics, college enrollment increased by 11% from 1990 to 2000 and by 37% from 2000 to 2010. For public colleges, state aid has suffered during the recession. The other driver has been labor costs -- but not necessarily of professors. Total university expenses grew 35% from 1993 to 2007, but administration expenses grew 61%. Meanwhile, a greater number of teaching assistants and nontenure professors are teaching.

The potential outcomes
If college debt scares away students from earning higher degrees, future productivity, innovation, and prosperity could be at risk. Even dramatic solutions like dismissing all student debt would only be a short-term cure, as that would treat the symptom instead of the cause.

There are many companies working to solve these issues. In primary education, K12  (NYSE: LRN  ) utilizes personalized curricula and online classes to, according to its website, outperform the norm in both reading and writing across all grade levels. However, some studies have concluded that such online schools performed significantly worse.

In higher education, companies like Apollo  (NASDAQ: APOL  ) -- which runs the University of Phoenix, Bridgepoint Education  (NYSE: BPI  ) , and the Washington Post (NYSE: GHC  ) -- could have offered a low-cost option to higher degrees. But they have struggled as they run up against regulations like the 90/10 rule, which limits how much revenue can come from most government aid programs. And perhaps in a drive to recruit students, these for-profits exhibited high withdrawal rates of students, from Apollo's 66% to Bridgepoint's 84%, leaving students with debt and no degree.

In the end, the return on investment of fixing education may not be high enough for a for-profit organization to solve. All these stocks have underperformed the S&P 500  (SNPINDEX: ^GSPC  ) this year, with the market beating the best performer by more than 15%. Perhaps the future is in open courses offered by MIT, Harvard, UC Berkeley, and the University of Michigan, as well as new nonprofit start-ups like Khan Academy.

If you're lucky enough to be free of student debt, be sure to take the right steps for your retirement. Don't make the same mistakes as the masses. Learn about "The Shocking Can't-Miss Truth about Your Retirement." It won't cost you a thing, but don't wait, because your free report won't be available forever.

Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On November 28, 2012, at 4:12 PM, electedface wrote:

    Student debt is stunting the growth of the economy. Student loans have increased by 275% over past decade.

    As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.

  • Report this Comment On November 30, 2012, at 9:43 AM, TMFLouis wrote:

    Student loans don't only impact future generations. As someone who had to go back to school in their mid 30's to retrain I am well aware of this fact. While mine are not as bad as some of the six figure horror stories I have heard I will be paying mine off for years to come.

  • Report this Comment On November 30, 2012, at 9:50 AM, XMFGortok wrote:

    "The government should provide subsidized loans. It allows those who wouldn't have the resources to earn higher degrees, which are extremely important in finding employment and maintaining a stable social structure. "

    By that argument, the government should provide every person with $1,000,000, since those that are richer tend to be better off. (apologies for the Breitbart link).

    The government subsidizing the cost of education is exactly what causes the price of education to rise. In an relative absolutely free market (think Electronics) without subsidies, the price of the cost of a good naturally falls.

    That doesn't mean that everyone who wants an electronic device gets one, but it puts it in more people's reach than it otherwise would.

    So too with Education. College is important, no doubt, but there are lots of alternatives today that didn't exist -- and these alternatives exist in spite of the government meddling, not because of it. Things like Khan Academy, online classes ( ), and the availability of knowledge online (through Wikipedia, et. al.) make it so that someone need not go to college to study the liberal arts.

    When the student loan bubble finally bursts, it's going to be painful, but this never had to happen.

  • Report this Comment On December 01, 2012, at 6:33 PM, 13thOlympian wrote:

    Can you provide raw numbers? They would be more helpful as, for example, when total number of Mortgage debt comes down, even if Student stays steady, or changes a bit, its percentage will have rise

  • Report this Comment On December 04, 2012, at 1:36 AM, XMFHelloNewman wrote:


    Very true. 60% of borrowers are above 30, 66% of the debt balance is owned by those above 30, and 75% of the past due balance is owed by those above 30.


    As Salmon says, we're competing globally. Give everyone in the U.S. an education, and that puts the country in a better position to compete.


    Numbers are available here:

  • Report this Comment On December 05, 2012, at 1:43 PM, XMFGortok wrote:

    @TMFHelloNewman My question wasn't flippant in the least. It was a serious question. If you're willing to give everyone money to get an education (in some cases, hundreds of thousands of dollars); why not just give people a million dollars? There's nothing special about education that makes people necessarily more likely to succeed (as evidenced by the fact that there are so many people with college degrees unemployed), and the number of students that have gone back to college just because they want the financial advantages it brings (not having to pay off existing student loans).

  • Report this Comment On December 05, 2012, at 1:52 PM, whereaminow wrote:

    ---> Take a look at the difference in unemployment between those with bachelor's degrees and those with no college: <----

    I'm looking at that graph and I see no difference over time. Currently it's 8% vs 4%, whereas at the start of the graph it's 7% vs 3%. This doesn't make your point. It works against it.

    As TMFGortok correctly pointed out, the causal mechanism for the increase in college costs is the introduction of money via government intervention.

    Education is not a free lunch. It must be taken not given. Educators faced with real market pressure would adapt to provide low cost services that are consistent with market needs, not high priced diplomas whose only real value is providing young adults with a temporary false self esteem.

    It is one of the best decisions I made. I have been in the computer field for over a decade, advanced in my field several times, work from home permanently in the California sunshine, yet never took a single college level computer course.

    I can't think of a bigger waste of time than college courses. If I'm interested in Plato, I can Google "Plato".

    (The only exception I can think of is advanced scientific and engineering research, as the universities have tools available to them that many regular consumers do not. But that's a fraction of University students. And I'm not even sure that'll be true with the growth of computer simulation technology.)

    David in Liberty

  • Report this Comment On December 05, 2012, at 5:05 PM, TopAustrianFool wrote:

    "The government should provide subsidized loans. It allows those who wouldn't have the resources to earn higher degrees, which are extremely important in finding employment and maintaining a stable social structure."

    Nope, it allows people to get educational degrees that are not needed by the wealth producing portion of the economy, by obscuring the risks that come with certain careers. It also passes the cost to everyone else and cheats individuals of the free-market price information they need to make career decisions that will affect the rest of their lives.

    Education has become a scam. With a made-up artificial crisis in Science and Math and other professions. If there is really a crisis then salaries would increase to a level where individuals would be willing to take the lhuge risks and long delayed gratification of a long degree in science. Instead we have a glut of unemployed PhDs.

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