College is expensive—and getting more so in recent years, with costs advancing at a rate far exceeding overall inflation. And many students borrow (occasionally heavily) to meet the expense—including some who have no immediate hope of repayment after graduation. With government college loan rates potentially set to reset higher in July, this has ignited fears of a potential debt-drag on US economic growth. Yet, given some perspective, these fears seem very unwarranted from a market and economic impact point of view.
The issue at hand seems to be the scheduled July 1, 2013 expiration of 2007 legislation that gradually reduced student loan rates. If nothing changes, rates would double from 3.4 percent to 6.8 percent. Student loan delinquencies already exceed credit cards, and some fear the rise would crush recent college graduates.
Higher rates would clearly impact the students and graduates involved. Yet the student loan market is government-guarantee dominated—there's very little private sector exposure here. In fact, the government is currently originating roughly 93 percent of overall student loans, up from 77 percent prior to 2008. So for inherently private sector stocks and markets, the direct effect is minimal at best.
Another reason the effect is minimal is only about a third of borrowers would be impacted. The affected rates are only on certain loans—basically subsidized Stafford loans—issued after July 1, 2012. Preexisting loan rates are unaffected.
But this all assumes July 1 comes and rates shoot higher. And that’s a speculative bet at best. Just last year, Congress faced the exact same scenario on this exact topic—a looming automatic rate hike on July 1. Yet, when push came to shove, a last-minute extension was passed on June 29. Hence, it seems there’s plenty of time to figure out a deal before the automatic rate increase occurs, particularly given Congress's penchant for last minute can-kicking.
And talks are already underway. Many and varied versions of bills circulating Capitol Hill presently seek to forestall the rate doubling. Some are getting little attention and stand next-to-no chance of passing. Other bills with broader support seek to extend current rates. Still others, like a bill the House passed recently, tie rates to 10-year bond yields plus a spread. That's similar to a proposal in President Obama's budget, though the spread and terms differ. There's currently ample time and political will to prevent this student-loan-fiscal rock climb. And importantly, while many may unfortunately carry student loan debt, the unemployment rate for those workers with a Bachelor’s degree is presently 3.9%, down from its recent cyclical peak of 5.1%. Hence, the number of folks with a degree, too much debt and no job is seemingly a small share of total borrowers.
Last year, when the extension passed, it was an election year—perhaps a factor in its passing. Yet in a very realistic sense, politicians are nearly always on the campaign trail. We're betting relatively few of them decide they want to look as though they're putting a big squeeze on higher education, and will vote for politically popular proposals pushing out loan rate hikes further.
This constitutes the views, opinions and commentary of the author as of May 2013 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.
By Todd Bliman, Fisher Investments
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