Student loan debt as major threat to U.S. economy

Those of you who follow with interest the discussion of a higher education bubble might appreciate a Bloomberg Businessweek article that probes the potential negative economic impact of rising student loan debt.

Student loans today are one of the only deteriorating pockets of consumer credit, with balances and delinquency rates rising to record highs even as a strengthening economy allows Americans to reduce total borrowing. Outstanding student debt topped $1 trillion in the third quarter of 2013, and the share of loans delinquent 90 days or more rose to 11.8 percent, according to the Federal Reserve Bank of New York. By contrast, delinquencies for mortgage, credit card, and auto debt all have declined from their peaks.

The New York Federal Reserve’s move to measure the size of the student loan load says a lot about how concerned the central bank is about a possible threat to the economy. “Our job is to really understand what’s happening in the financial system,” and the “very rapid rise in student loan debt over the last few years” can “actually have some pretty significant consequences to the economic outlook,” New York Fed President William Dudley told reporters in November. “People can have trouble with the student loan debt burden—unable to buy cars, unable to buy homes—and so it can really delay the cycle.”

The federal government is the source and backer of most of the loans. “I’m always made very nervous by a credit market that benefits from government guarantees and is expanding very rapidly,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said on Jan. 10 at a Greater Raleigh Chamber of Commerce event in North Carolina. “That’s what we’re seeing with student loans, and it’s what we saw with housing.” As the New York Fed’s Dudley explained in November, “to the extent that student loan burdens become very, very high, there are presumably going to be losses” to the federal government.

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