Tuesday, October 1, 2013

Debt Serfdom Via Student Loans

A new class of indentured servants now carry the $1.1 trillion student loan bubble and cracks are already plaguing the system


Originally published at mybudget360.com
$1.1 trillion.  That is the amount of student debt being carried on the backs of millions of Americans.  Student debt has become a rite of passage for many young Americans.  In fact, many Americans establish their first credit line with student debt as they enter college.  The crisis is large and has a direct connection to the abysmal savings that younger Americans have.  The press has tried to downplay this debt sector because students continue to carry the burden making minimum payments on the debt.  Yet even with this, student debt is the most delinquent household debt sector in the United States.  There are deeper trends at hand yet the amount of debt floating around in the student debt markets continues to expand.  Disposable income of younger Americans already ravaged by the recession continues to be sucked away into this gigantic burden.  Are we creating student debt serfs via higher education?
From credit cards to student debt
This is an interesting chart showing the shift in household debt over the last decade:
student-loans-home-equity-credit-lines-auto-credit-card_chart
Student debt is now the largest non-housing related debt sector in the country.  This is a dramatic shift.  In 2004, student debt outstanding was at $260 billion:
household debt 2004
Today, it is at $1.1 trillion looking at more recent figures:
household debt 2013
And this is a very important point to understand.  Credit card debt in 2004 was around $700 billion.  Today it is at $670 billion which is a decrease in the last decade!  That is a major shift in debt spending habits of Americans.  However, with credit card spending this at least added fuel into our consumption based economy (not that this was a positive either when you spent well above your budget).  What is being accomplished by students going into massive debt to attend a paper-mill for-profit institution?
Most delinquent loan of them all
The most delinquent of all household debt today is student debt:
screen-shot-2013-09-23-at-8-21-57-am
What makes this even more problematic is the inability to dispose of this debt even through bankruptcy.  Many Americans find their balances ballooning because of the odd structure of these loans.  Late fees and penalties compound over and over to increase balances, at times even doubling the initial principal loaned.  It is a vicious cycle that many Americans are simply unable to get out of.
Take a look at this example:
“(Student Loan Justice) I don’t have all the facts and figures about my situation but here’s a synopsis. I graduated from chiropractic school (1989) and defaulted on my federal student loans (for the same reasons that others have had to default) that totaled approximately $40,000 (in 1989) and now total $320,000 (based on a collection agency’s claim in 2005).  I can’t renew my license to make a living (much less make payments (they wanted $800 per month in 1996) on the loans) and have experienced feelings of hopelessness, despair, no self-esteem, depression, suicide, etc., etc.”
You can read through the site but this is not uncommon.  So an initial balance of $40,000 ballooning up to $320,000.  This is worse than loan sharking!  Yet this is the current archaic system that many people find themselves in.  And of course, the government backing of student debt makes this bubble even more dramatic.  There is a reason housing is bubbling up once again now that the Federal Reserve has taken it upon itself to own the housing market.
Makeup of student debt
Student debt cuts across all programs:
gradloandisburse2
It is interesting that student debt in 2012-13 is made up by 40% graduate loans.  Part of this is programs like law that have insane price tags for a very little return on investment.  It is no surprise that law school applications have fallen through the floor.  Yet the market is still being pushed by the four year degree model.  A large portion of government funding is going to for-profit paper mills where you might as well go on YouTube or TED and teach yourself (you’d probably get a better experience).  Yet these institutions go after the poor and underserved since they spend nearly one-third to half of their budget in marketing.  Plus, these schools depend on 90 percent or higher government financing.  This is how a new form of debt slavery is created.
The bigger ramifications are already being seen by households witnessing incomes falling and younger Americans finding more of their disposable income being allocated to student debt payments.  Welcome to serfdom via student debt.