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About That Student Loan Time Bomb

"One of the biggest economic issues of our time." "A problem that has trapped recent college graduates and threatens the long-term health of the economy."  Or

"One of the biggest economic issues of our time."

"A problem that has trapped recent college graduates and threatens the long-term health of the economy." 

Or "endangering the economy."

Or "a drag on the economy."

At least, that's the popular interpretation of the steadily rising amount of student loan debt—allegedly a $1.26 trillion dollar ball and chain holding back the Millennial generation, preventing them from buying houses and starting families, and posing a big long-term threat to the US economy. With President Obama signing an Executive Orderto cap some borrowers’ repayments at 10% of their annual income, and with the Senate squashing a bill to allow borrowers to refinance at lower rates two days later, this is a hot election-year issue. However, the data overwhelmingly suggest this political hot potato isn’t an economic issue.

Yes, student loan debt has jumped from about $500 billion when 2006 began (the earliest full dataset) to nearly $1.3 trillion as of Q1 2014. Yes, student loans are exempt from bankruptcy—you can’t write them off, no matter the hardship. So on the surface, it would seem student debt is a mounting, unshakeable burden.

But a surface view tells you nothing. For one, that $1.26 trillion is spread across nearly 40 million borrowers, which averages out to about $30,000 per person. According to the New York Fed, the median amount owed was about $12,000 at year-end 2011—half of the then-37 million borrowers then owed more, half owed less. Nor is the burden concentrated among folks just starting out. As of Q4 2012, only roughly one-third of the total was owed by the under-30 crowd (about 15 million borrowers). Another third was owed by folks aged 30-39 (about 10.9 million folks), and the remaining third by the over-40 set (12.9 million folks). It seems exceedingly difficult to argue younger folks are disproportionately impacted here. For a lot of these folks, the amount they owe is about equal to a car loan.

Now, it is true fewer folks under 40 own homes. The 2010 census showed homeownership among those aged 25 to 29 was down from 41.8% in 2006 to 36.8% in 2010.For the 30 to 34 year bracket, homeownership peaked at 57.4% in 2004 and was down to 51.6% by 2010. For ages 35 to 39, 2010’s 61.9% rate was higher than their younger peers, but still below their own peak in 66.6%. However, it’s a stretch to say this is because of student loans. For one, homeownership is down across the board—only septuagenarians are really holding steady (and, I’d be remiss to point out this hasn’t prevented the economy from growing). Two, we had a housing crisis. Three, since said housing crisis, we’ve had a shortage of home supply: Construction hasn’t kept up with population growth, particularly in the most populated (and attractive to younger folks) urban areas. This hurts younger folks who’d otherwise be financially equipped to buy. That’s true whether or not they hold student loans.

Beyond that, the notion student loans prevent grads from making meaningful economic contributions is just plain flawed. The result of a student loan is a college education. As shown in Exhibit 1, the rise in student loan debt has corresponded with a rise in the number of folks with at least a bachelor’s degree—both on an absolute basis and relative to the total population.

Exhibit 1: Number of Persons Aged 25 and Up With at Least a Bachelor’s Degree

Source: US Census Bureau, as of 6/12/2014.

And as shown in Exhibits 2 and 3, these folks tend to fare much better in the workplace.

Exhibit 2: Selected Employment Statistics, January 2004 – May 2014

Source: Bureau of Labor Statistics, as of 6/12/2014


Exhibit 3: Selected Median Weekly Earnings, January 2004 – May 2014



Source: Bureau of Labor Statistics, as of 6/12/2014

So, to recap, more loans means more college educated folks, which in all likelihood means more folks working in higher-paying jobs. It seems extremely fair to assume higher earning power offsets much (if not all) of the overall burden of student loan payments.

But even if it doesn’t, the “economic problem” argument doesn’t hold. The logic behind this claim is that high debt prevents household formation and all that comes with it—buying a home, furnishing said home, having kids, clothing and feeding said kids, and so on. But even if student loans price millions of potential first-time homebuyers out of the market, with residential real estate only about 3.1% of the economy (down from a peak of 6.6% in Q1 2005)—and first-time buyers a small slice of that—the impact is minimal. Spending on furniture and other durable home goods is 2.4% of total consumer spending and 1.7% of GDP—and it’s 12.6% over its pre-recession peak in Q1 2007. Spending on food and clothing is up, too—yes, adjusted for inflation.

Granted, there is no counterfactual—we have no way to know how these numbers would look if student loans hadn’t doubled since the mid-2000s—but the evidence overwhelmingly suggests our economy can more than overcome whatever drag might exist.

So, too, can markets. However you slice it, $1.26 trillion in US student loan debt is not a risk to the earnings of publicly traded companies globally—this is not a long-term structural issue. Nor is it anything near the sort of huge, global, unseen risk that’s usually needed to derail a bull market. Not when it has been so widely discussed for so long and pales in size to the $74 trillion global economy. It’s a sociological issue and political lightning rod, but not an issue with the size and scope required to hold material influence over global markets.

By Elisabeth Dellinger, Fisher Investments

This constitutes the views, opinions and commentary of the author as of June 2014 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. No assurances are made regarding the accuracy of any forecast made. Past performance is no guarantee of future results. Investing in stock markets involves the risk of loss.

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