I’ve said it to kb in conversation, but I predict a student debt jubilee to be one of the levers pulled during the next recession. We need to generalize the notion that the less hazardous debt is for lenders, the more hazardous it is for borrowers.
Not gonna happen. 1) Student loan debt is held by millennials, by and large. They have no money, they have no houses, they have no earning income. Relieving their debt will not power consumption (so will say the old rich white people). 2) Student loan debt is 45% of federal government assets according to that first link. HALF the positive numbers on the balance sheet of the US government is student loans. One dollar out of two. 3) Let's look at the other side of the balance sheet: So on the one hand, we've got people who are working who don't fucking vote. On the other hand we've got people who are ENTITLED to $122 trillion in pension and social security who vote every fucking time. It's a good thing millennials are used to roommates and Uber. 'cuz they've got a future of roommates and Uber.
Baby Boomers own 32 million homes. Two out of five in America. They'll want to sell their extra ones as retirement approaches. Especially when their social security starts falling out the bottom. Millennials, saddled with a cool $40k of student loan debt at the start of their careers, aren't looking to take on more long-term debt. No house mortgage for me, thanks. A generation of renters and roommates, sure, I'll skate around buying a house until it's absolutely necessary. When I know I'm sticking around or whatever that means. We all saw our parents get fucked in '08, not trying for a repeat - although that'll probably happen anyway. And honestly, $20k-$40k of debt is not a lifelong issue. It's payable. So it'll get paid off usually and eventually. This is the next generation of America's workforce, and we're getting a later start than usual. So yeah, there's no generational earnings yet, because Boomers are retiring later and later. Hogging all those good, non-gig economy jobs with benefits and salaries. But there will be, because Boomers will retire some day. And the $1.4 trillion in debt will be paid off because it better be. Everyone's counting on it. The problem is student loans are slowing the generational transition of equity. It's slowing Millennial home ownership, which is culturally signified real adulthood. It's slowing Boomer retirement plans and equity values because greedy dicks love an expensive house or three and won't be able to push them off. And it'll kick all these problems a little farther down the road as Gen Z comes across all the same shit in 10 years but worse. It probably won't be a big enough issue to require debt forgiveness, but it also really might. There's incentive for Boomers to get on board, but they'll probably just blame Millennials for ruining retirement too, along with everything else.
There are several problems to deal with: STRUCTURAL UNEMPLOYMENT. One of my beefs with my current school curricula is that one professor is preparing kids to be shift workers pressing buttons on machines. I can now buy a robot on Kickstarter for $7k to do that job - fuck Fanuc or Universal Robotics. Kickstarter. The other professor is teaching everyone the joys of handwork and sweatshop labor; I'm eschewing making chain because we aren't learning anything I can't buy a Fasti machine to do for $20k. Which doesn't mean I should buy a $20k Fasti machine. It means I should buy chain from someone who has one. These jobs are going away rapidly - 70% of them in the next ten years according to McKinsey. I know several guys in Hollywood who are hoping they'll still be working when their pensions kick in. The oldest one is about 5 years away and he's not gonna make it. But the kids? The millennials pining after the sweet sweet jobs the Olds have now? The Olds are going to take those to their graves. When my father-in-law retires in December, no one will advance to fill his position. It's too expensive. His position is retiring with him. COMPOUNDING INTEREST OR THE LACK THEREOF. Your "parents" took it in the ass in 2008. So did their pension plan. So did their 401(k). And all else being equal, X minus 20 percent is not going to compound as fast as X. So they'd love to retire but they can't afford to. Leave social security out of it; the average payout is $1372 a month. I remember when my boss' retirement took a ten-year hit in 2000 and guaranteed - it wasn't back where it needed to be by 2008. You're right - the Olds would love to sell their house to those pesky avocado-toast-eating whippersnappers for enough to retire to Boca in style. And you're right - the toast-eaters can't afford what the Olds paid for the dump back in '83. But look what you did here: Arithmetic is subject to neither threat nor hope. Global warming is gonna get solved because it better be. The solution, unfortunately, will be a peril-fraught and disorderly migration from the tropics. I have yet to see a solution to our balance sheet that provides happy outcomes for more than a select few. Hope for the best, plan for the worst. And the $1.4 trillion in debt will be paid off because it better be. Everyone's counting on it.
Yeah, I read Jobs Lost, Jobs Gained too. It's been out long enough. We all know job prospects are shit in the coming decades. People who don't know that yet are still voting R. But ya don't need a fancy corporate desk job to pay down $40k in 20 years. Garnished Starbucks paychecks will do just fine too. We agree that Boomers have an incentive (recognized or not) to not let this debt restrict equity creation in younger generations, no? That was my main point, so if that's clear then we're good. I was replying to this: "Relieving their debt will not power consumption (so will say the old rich white people)." Whether the Olds realize it or whether they prefer to grip their withered jewels at us, debt forgiveness would power consumption in their interests. But so "...because it better be. Everyone's counting on it." wasn't me saying shrug "It'll work out, let's ignore the facts." The situation is grim, and (as you know) this debt doesn't work like other debt. We're all stuck with it until it's (1) paid, (2) collective undue hardship is proven (i.e. debt forgiveness or generational bankruptcy), or (3) we die and/or the loan expires. As the social/economic realities come to bear and the voting population reflects the people carrying the burden (in unsellable/uncompetitive home equity or debt liability) rather than gaining from it, we might see support shift from #1 to #2. And we'll see some creative politicians who want to keep their jobs and are willing to lie about the arithmetic to do it. Because it might not be subject to hope or threat, but it is subject to manipulation. We'd still all be fucked of course.
The Law of Averages Let's take an average new grad. He's making $50,556 a year because he's average. he's got $40k in debt because he's average. He's paying $10k a year in federal tax because he's average. He's paying $3100 in FICA and $750 in medicare. His student loan at 5% is $438 a month ($271 if he's doing income-based repayment). Every month he pulls down $2800 or so. $1000 of that goes to rent because he's average. $300 of that is groceries because he's average. Let's say his average-ness continues and his $4200/year transportation costs come down to $350/month. If he has no phone, no internet, no Netflix and no other joys in his life, he's got about a thousand dollars a month left. Of which his student loans are between a quarter and a half of that. Let's say he's gonna retire that damn debt - loan forgiveness be damned! If he wants the median house, he's gotta sock away $40k for the down payment. That's gonna take him about four and a half years of spending absolutely nothing that isn't essential and then he's gonna be paying out 75% of his remaining income on a mortgage payment, leaving the poor bastard $250 a month. I guess he can finally afford that cell phone. he sure can't afford kids. If he's smart he goes income-based repayment. Then he saves $150 a month. Of course he'll pay it forever, wink wink, nudge nudge, although really he's banking on forgiveness after 360 payments. The government, of course, is not doing this - income-based repayment is supposedly temporary so they're accounting for that as if it's debt that they'll get to collect. So now here we are - the government is planning on paying for money that isn't even there as much as they think it is. The Olds are planning on selling their houses to people who can't afford them, and on their retirements being paid for by workers who don't exist. It amuses me that "debt forgiveness" and "debt jubilee" are good things we should all get behind without recognizing that they're euphemisms for "bankruptcy." Our system is built on IOUs and just because the money doesn't exist doesn't mean nobody's dependent on it. The Olds are dependent on selling their house for three times what they paid for it so they can retire. The Youngs are dependent on the old people retiring so they can afford to buy houses. And it's not going to work out. There's going to have to be some serious seizure of wealth from those top brackets and it's still not gonna cut it. There's $210T in unfunded liabilities and $93T in household wealth. Our average new grad with the $50k salary? The US government has $100k in unfunded liabilities just for him. I don't see a graceful unwinding for any of this. I've been looking. I think there's gonna be a lot of ramen and vans and I think the higher your income decile, the better off you'll be.
That average new grad? Me. Except higher rent 'cause Boston and lower transportation costs 'cause MBTA (at least for another week - then it's RTD for me!). I did an IBR plan, so I have a cell phone. I think I'm kinda murky on your overall point here though. I don't think anyone's drawing a distinction between forgiveness and bankruptcy in this dialogue. They're the same thing in my mind at least, and I said that already ("i.e. debt forgiveness or generational bankruptcy"). And if you're predicting a choice between massive, gullible fuck-up (option #2 above) or slow, throttling burn (option #1), then so am I. And to be clear, option #2 won't work. So maybe I'm missing it, but what I'm trying to point out is that this problem is going to get more and more serious as time passes and the usual schedule of generational maturation is stymied. Plenty of people who didn't take out the loans will be affected. One example are Boomers and the housing market, but there'll be others too. And the more effect it has, the more people think an easy-peasy jubileezy will work, or will say it would work: Olds, Youngs, Political Husks, Corporate Demon Puppeteers. A whole generation (and probably the one following) of late financial bloomers is going to attract a lot of attention. "Where are my debt-friendly, Millennial consumers!?!" "Eating the rich." Or that's what the memes say at least. But we won't do that. Instead we'll keep the $50k jobs and pay monthly minimums and never have home equity and pipe-dream the next 20 years away, unless we're lied to about the viability of debt forgiveness by a Husk "who gets it." In which case we'll zeitgeist quick, because that's all anyone my age ever thinks about and fuck the arithmetic. And I don't think that movement will just be sub-30s. And I don't think it'll work.
If I gave you the impression we're arguing I'm sorry. We're largely in agreement. My principle concern in this whole miasma of shit is that the public discussion, when there is any, is about UBI and jubilees and we're already spent so far into nonexistence that if that money isn't in your filthy grubby hands right now you're a fool for counting on it.
If you get stuck paying interest too, it gets out of hand quick. It only takes 3% interest on 40k over 20 years to eat all of full time minimum wage.But ya don't need a fancy corporate desk job to pay down $40k in 20 years. Garnished Starbucks paychecks will do just fine too.
Source? I think your math's wrong. Or maybe mine is. With 4% interest (closer to the subsidized rate for 2022 grads these days) and no payments towards principle or interest at all for 20 years, the loan doubles but interest accumulation per year is just shy of $3500 at year 20. Not easy to make on $15k/year, but no one's making it 20 years without intervention. Wage garnishments kick in about a year and a half after default notice and a collections referral (interest accumulation per year at around $1.6k, manageable). I have four friends in this situation right now. A collections agency will take up to 15% of your income to pay down the debt. At minimum wage, that more than covers interest with a little to spare for principle, so it's paid down as long as the debtor works somewhere - APRs are just so low. And you'll live, just with roommates and side gigs mentioned above. It's a slow bleed, not exsanguination. They need the debtor livestock to live.
Ouch yeah I was way off. I threw it in a spreadsheet and compounded monthly at the annual rate. Minimum payment is about 220, not 1200.