Student Debt Goes Against the Grain in Q1

The economy roars / but don't tell that to students / knee-high in school loans

   
Student Debt Goes Against the Grain in Q1

Look left and right, and you’ll see plenty of evidence that the worst for the economy might just be over.

Today’s manufacturing data, for one, might have been disappointing, but activity in the sector is still expanding. Retail sales remained strong even in the face of the payroll tax hike, higher gas prices and the dreaded sequester, and the stock market burst out of the gate in 2013. During the past three months, the Dow Jones and the S&P 500 both hit all-time highs despite over-the-pond debt woes and other headwinds.

But those are just the headlines. And besides the fact that a spring selloff seems likely, there’s another reality we must face: Things sure aren’t getting better for all Americans. There’s at least one area where an improving economy can’t seem to make a dent: student debt — the only kind of household debt that continued to rise through the Great Recession.

In the first quarter of the year, student loan defaults surged. The total amount of loans that were “severely delinquent” and “charged off” increased by an ugly 36% during Q1, adding up to more than $3 billion. Now, for federal borrowers alone, 6.8 million are in default — a total of $85 billion.

Consider this: So many loans are souring that collection efforts are having a hard time keeping up. According to CNBC, more than $1.1 billion in defaulted student loans are stuck in “computer limbo.”

And to top things off, the overall load of outstanding student debt jumped by 14% in the first three months of the year.

The moral of the story is obvious: For day-to-day folks simply trying to pay off their college education, things still aren’t pretty.

The issue is more than just a few ugly numbers, too. There are numerous factors at play, and a lot of sectors that subsequently could be affected. A few things to consider in the face of recent student debt struggles:

Underemployment

Part of the problem is that the expensive four years (or more) of college education haven’t translated into higher-paying jobs for many folks. This was, of course, affected by the recession … but unfortunately, as the Wall Street Journal recently reported, the underemployment problem of recent years is looking less and less temporary as well.

That doesn’t even consider the many folks who are saddled with student debt yet never finished their degrees. The Journal noted: “As college-educated workers have been forced to take lower-level jobs, they have displaced less-skilled workers, leaving those without degrees with few job options.”

A low-paying job — or no job at all, especially in the face of an ever-competitive market and still-high unemployment — sure makes it hard to shell out hundreds of dollars a month to pay off tens of thousands of dollars’ worth of loans.

Sequestration

On top of that, federal employees could be especially pressed to deal with their debt in the face of sequestration-induced furloughs. A recent CNN Money article, for example, profiled a single mom who testifies that her student loans will be the first thing to hit the back-burner in the face of an upcoming pay cut.

While student loans are important, they are less imminent than putting a roof over your head, getting around and feeding yourself and your family.

As we’ve touched on before, this is just another example of how the across-the-board budget cuts are far more than the “abstract political fight” they’re often turned into. Instead, the cuts are real … and are cutting into already-tight budgets for individual workers.

Housing

Finally, as we’ve also covered before, hard-pressed and debt-ridden consumers are less likely (or able) to take out other forms of debt, including mortgages. As Housing Wire put it: “Post-graduates are scrambling to cope with their ever-looming debt, making the benefits of buying a house in the improving housing market a second priority. The latest [loan] numbers are proof of this sentiment in motion.”

See, even though real estate is going strong, a good chunk of its comeback is thanks to a deliberately slow release of bank foreclosures, and hedge fund and investor purchasing of real estate. Plus, low interest rates don’t do the trick for 20- and 30-somethings who are struggling to make ends meet and often watching their student loans sink into default.

And higher prices can be a double-edged sword. Even if they create a wealth effect for those who already have a mortgage, the rebound sure doesn’t help first-time homeowners trying to manage a pile of debt and buy increasingly in-demand (and thus increasingly expensive) homes.

Bottom Line

With all that in mind, one thing is clear: Let’s not get ahead of ourselves when cheering the strong start to Q1. While the markets have been climbing to record highs, so are student loan delinquencies — and that’s an issue with few solutions in sight.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/student-debt-goes-against-the-grain-in-q1/.

©2014 InvestorPlace Media, LLC

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