Market Overview

UPDATE: Student Loans: One of the Biggest Economic Issues of 2012?

In January 2012 I asked, "Are student loans going to make for one of the biggest economic issues this year?" Given several recent headlines, it would appear that the answer to that question is a resounding yes. I also recently discussed how student loans are emerging as one piece of a much more precarious economic puzzle. Though student loans do not appear to be too much of a mainstream market concern, there is reason to believe that the phenomenon of student loans is a substantial hole in the ship that is the US economy. One might say that student loans are becoming one of the biggest financial problems facing the US going forward -- as young consumers have less funds for discretionary spending while food and energy costs rise.

The Wall Street Journal's Josh Mitchell and Maya Jackson-Randall recently reported that "the amount Americans owe on student loans is far higher than earlier estimates." This situation portends that more and more consumers may be postponing buying homes and getting married, "potentially slowing the housing recovery". From the article: "The new figure -- released Wednesday at a banking conference in Austin, Texas -- is a preliminary finding from a study of student debt that the bureau plans to release this summer."

According to the Wall Street Journal article, reasons for the rise in student loan debt are owing to an increasing number of Americans attending college "to escape the weak labor market". Even further, as states cut funds to higher education, students are finding themselves having to take out bigger loans. Third, "interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains." Per the Wall Street Journal article, "as many as one in four student borrowers who have begun repaying their education debts are behind on payments." One in four.

Despite the oft-told argument that a college degree leads to higher income, indebted, educated students are left to confront a dire labor market. As such, "as more people go to college and assume bigger loans for education, they may take longer than previous generations to hit key milestones such as buying a house or getting married." Further, students may have problems saving enough funds to put forward a down payment on a home and/or qualifying for mortgages.

The Consumer Financial Protection Bureau's Rohit Chopra commented that student loan debt "could ultimately slow the recovery of the housing market." Chopra: "Instead of saving for a down payment, [student loan] borrowers are sending big payments every month." Ergo, less consumer discretionary funds to use on luxury, entertainment, vacation, consumer goods, housing, et al.

Mitchell and Jackson-Randall's article also suggested that high student loan debt may be a burden for parents "who often co-sign their children's student loans" and "midcareer professionals who opted to go back to school during the sluggish recovery." From this perspective, as young Americans seek refuge from the struggling job market via higher education and as young Americans find themselves depending on student loans to survive, one might even suggest that student loans are a form of state funding akin to "welfare that must be paid back".

The connection between student loans and parents appears to also raise questions regarding retirement savings. In February 2012, CNBC's Sharon Epperson wrote, "Parents who borrow money to pay for their children's college education are exacerbating a growing student loan crisis." From the article: "Student loan debt amassed by parents is growing faster than loans take out by the student." As parents who co-signed loans or borrowed funds for their children's education find themselves squeezed by rising living costs and declining property values, Epperson's discussion suggested that "America faces the very real possibility of another major threat on par with the devastating home mortgage crisis."

According to the National Association of Consumer Bankruptcy Attorneys' vice president John Rao, "Parents who take out loans for children or co-sign loans will find those loans more difficult to pay as they stop working and their incomes decline." Per Epperson's analysis, "Parents have an average of about $34,000 in student loans and that figure rises to $50,000, including interest, over a standard 10-year loan repayment period." According to the financial aid resource website FinAid.org's founder and publisher Mark Kantrowitz, "Parents should borrow no more than they can afford to pay in 10 years because they have to worry about their own retirement. By the time they retire, they should have no debt remaining since they will have no income to repay that debt."

As I have previously explored, an interesting dimension to the student loan bubble can be found in the legal sector with its own respective law school bubble. Precariously and interestingly enough, the Atlantic's Jordan Weissmann wrote on March 20, 2012 that the law school bubble has finally popped. Weissmann: "The era of twenty-somethings blindly stampeding their way towards law school seems to be finally, mercifully drawing to a close."

Per Weissmann's article, the number of students taking the LSAT [Law School Admission Test] has declined to the point that in the past law school admissions cycle, "fewer students sat down to take the LSAT than at any time in the past decade." The number of LSATs administered dropped to 129,925 from a peak in 2009-2010 of 171,514. Comparatively, the number of LSATs administered between 2000 and 2008 hovered around the 140,000 level.

In light of a stagnating legal job market and "a severe overabundance of young graduates, many of whom applied to law schools under the false pretenses that their degree would be an express ticket to a six figure salary", Weissmann's discussion portends the popping of the law school bubble whereas "many graduates are now contending with six figures of crushing debt and murky career prospects." That being said, the aftershocks of the law school bubble's bursting may not be completely felt in the legal industry for years to come. Per Weissmann's article, "According to the LSAC, the number of students who accepted admission to a law school dropped 8 percent last year, from 49,700, to 45,617 -- the smallest incoming class since at least 2002."

Whereas one may argue that the decline in law school entrants is owing to an improving labor market, Weissmann wrote that "America's slowly brightening employment picture doesn't seem like a likely cause in this instance" owing to trends in the US employment to population ratio. Weissmann: "So no, it's not the economy. It's more likely that the bad press surrounding the legal academy and the job market for young attorneys is taking its toll."

If the law school bubble is indeed a textbook financial bubble (as it appears to be), then we can expect a rising number of law schools to close in the near future and a rising number of professor layoffs at law schools -- leading to further problems in the legal job market. From this perspective, problems arising from the law school bubble could spill over into the entire legal industry. Even further, depending on how the federal government chooses to address the matter, we may see either a substantial rise in law school tuition or a substantial drop in law school tuition. In terms of a substantial drop in law school tuition, this could hypothetically include states' removing the requirement of law school attendance and the completion of a JD degree in order to sit for the bar. Alternatively, states could choose to reduce the amount of law school to one or two years with one or two years of legal "residency" required for the completion of a degree. We can also expect much greater scrutiny of the American Bar Association going forward.

On the topic of the law school bubble, it is significant to note that at one time in the US, law school was not necessary in order to become a practicing attorney. With the prospect of the law school bubble's bursting, we could possibly see calls for a return to a system where law school is not required for admission to the bar. Unlike the greater student loan bubble, what is precarious regarding the law school bubble is that law schools and legal academia are intertwined with the legal and court systems. As such, in the years to come the law school bubble's bursting may raise questions in the minds of some commentators regarding the social fabric of American society. There may be no easy answers to these questions.

As I have previously commented, the issue of student loans and excessive debt burdens on the shoulders of young Americans makes up only piece of the global economic quagmire that confronts us. As such, it's as if we can just throw student loans on top of the growing pile of geopolitical and financial problems facing the inhabitants of the planet Earth. Despite various comments regarding a possible student loan bailout, as for how the US will deal with student loans going forward, only time will tell. That being said, a financial bubble is a financial bubble is a financial bubble.

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