For all the talk of deleveraging, American consumer debt remains extremely high by historical standards. Some say it’s because we lack self-control. It’s undeniable that as wages have stagnated, households have been forced deeper in debt to maintain their important role as “consumers” in a consumption-driven economy. At the end of the fourth quarter, consumer…More
Category: Student loans
This week the National Institute on Retirement Security released a report showing that 90 percent of working-age households aren’t saving enough for retirement. About 45 percent have nothing saved. The result is a retirement savings gap between $6.8 trillion and $14 trillion. For those near retirement, the median retirement account balance is $12,000, and for all households it totals $3,000.
The findings confirm that the American Dream of retiring comfortably after a lifetime of work will be impossible for many. Based on 401(k)–type account and IRA balances alone, some 92 percent of working households do not meet conservative retirement savings targets for their age and income. Even when counting their entire net worth, 65 percent still fall short.
This is not exactly new-news. The baby boomers were the first generation to be forced into 401(k)s instead of pensions, and all too often they were given little schooling about the mechanics or stakes of this dramatic change. The new benefits were hostage to the stock market and the participants were completely on their own. Company matching contributions became more rare. In addition, changes in the economy such as globalization and the decimation of unions left huge portions of the workforce without any job-related retirement benefits at all, even as overall wages were stagnating. Much wealth was lost in the housing crash. This squeeze is worse for younger workers facing lower wages and high college debt. To make matter worse, politicians keep wanting to cut “entitlements,” including Social Security that is essential to senior citizens (it would be better to call them what they are: Earned benefits). And if we’re expected to work until we die, there have to be jobs and employers willing to hire older workers.
In a heavily unequal America, the top 20 percent or so will do fine. What about you? (Honor system: Answer if you are not retired already, having benefited from the middle class at its zenith).
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Friday’s report from Donghoon Lee of the Federal Reserve Bank of New York makes clear that the American bubble economy learned nothing from the Great Recession. With no meaningful reform in the financial sector, it’s cooked up a new one, this time in student loans. And it’s about to blow.
It’s not just that student debt is approaching $1 trillion compared with about $350 billion in 2004. “Student debt is the only kind of household debt that continued to rise through the Great Recession and has now the second largest balance after mortgage debt.” That means the burden is larger than credit cards, auto loans and others. While households have done some deleveraging after the big bust, people losing their jobs went back to school. With most Americans’ net worth about where it stood in 1992, they borrowed. The loans have been packaged into securities by outfits such as SLM Corp. and sold to investors. These derivatives are highly profitable and demand is rising. Now, as the new report makes clear, delinquency rates are rising.
Does this sound familiar?More
The amount of student loans made last year exceeded $100 billion for the first time and is on track to cross a total of $1 trillion total loans outstanding. According to the New York Fed, student-loan delinquencies are up 10.6 percent so far this year, including 7 percent in King County, 10.5 percent in Pierce and 8.6 percent in Snohomish. A USA Today report states that “students are borrowing twice what they did a decade ago after adjusting for inflation” and in the past five years total outstanding debt has doubled. That compares with falling debt on loans for houses and credit cards.
Reuter’s Felix Salmon disputes USA Today’s numbers, and has some interesting analysis here. Even so, we have an unsustainable situation. Graduates are starting deep in the hole, and aside from a few star professions it will take them years, decades, to dig out. This is another drag on the economy, another impediment to risk-taking and mobility of talent. And one has to ask: When will the major defaults begin and which institutions are most exposed, along with the taxpayers.
Yep, some of these loans have been sliced, diced, bundled and sold to investors just as happened with subprime housing loans. Publicly traded Sallie Mae, a Fortune 500 outfit, bills itself as “the nation’s No. 1 financial services company specializing in education” with $238 billion in education loans.More