There are many signs that the slow economic recovery may finally be picking up some steam. Economists are forecasting 4% growth for 2014. Both the official and the actual unemployment numbers have been declining, albeit very incrementally, month after month and are finally approaching levels that could be impacted meaningfully by targeted jobs programs—if, of course, there was Congressional support for such programs. Housing sales and permits for new construction are both up in most markets, as are manufacturing output and exports. And the stock market indexes are all at record levels. I am not suggesting that the economic situation is very good or even that the economic outlook is uniformly positive. But many of the key economic indicators are better than they have been since before 2008, when the Great Recession began.
Given the fairly positive economic news, it is not surprising that the delinquency and default rates on almost all types of household debt have been uniformly declining. As the chart below graphically indicates, the only type of debt for which delinquency and default rates have been climbing is student-loan debt.
There seem to be several major reasons for this anomaly.
First, student-loan debt has now exceeded all types of household debt except for mortgage debt.
Second, student-loan debt has been escalating at a much greater rate than any of the other debt. Because college graduates have had a much lower unemployment rate than those without degrees, the recession has reinforced the value of a college education. But, at the same time, the recession has accelerated the long decline in state support for public colleges and universities, creating a need for tuition increases and escalating the need for student loans.
Third, although college graduates have had lower immediate unemployment and can still expect much higher lifetime earnings than those without degrees, a large percentage of those graduating since 2008 have been underemployed, making it more difficult for them to remain solvent financially, especially given the increased student-debt burden.
Lastly, in the decade ahead of the recession, household debt had ballooned in proportion to bloated housing valuations, and when the housing bubble burst, even short-term unemployment left many American families unable to meet their debt payments. Since student-loan debt cannot be eradicated through bankruptcy, it stands to reason that default rates on that debt would continue to climb when rates on other types of household debt are declining.
No matter how the increase in student-loan delinquency and default rates might be explained, it is clear that the increased dependence on student loans is unsustainable in the longer term– for students and their families, for colleges and universities, and, more broadly, for the American economy, which continues to depend on consumer spending. What is clearly required is some restoration of state subsidies in combination with some other alternatives that do not require the next generation literally to mortgage their economic futures in order to earn a degree.