Student-loan Delinquencies Soar

"We are not a deadbeat nation, " President Obama famously said during the debt-ceiling fight.  We'll see how long the Treasury can sustain gargantuan deficits.  But at the level of individual borrowers,  and specifically young people with student loans, defaults are spiking at historical levels.    On February 28th the Federal Reserve Bank of New York reported that a staggering 35% of student-loan borrowers under 30 were at least 90 days late on their payments at the end of 2012, up from 26% in 2008 and 21% in 2004.

These figures exclude kids who aren't yet required to make payments, often because they are still in school.  As they mature and enter the labor market, they are learning how difficult it is to find a job that allows them to repay those loans.

And for those who can't the tab is likely to be pushed onto taxpayers.  The Department of Education became the originator of roughly 90% of U.S. student loans thanks to a provision passed along with the Affordable Care Act in 2010.  With accounting that even the Congressional Budget Office admits is fraudulent because it minimizes the cost of defaults, that the federal takeover was presented as a big cost-saver.

As a Senator and then President, Mr. Obama has also worked to enact a series of laws that expand the options to delay or avoid honoring these debts.  "Income based repayment" plans and eventual debt forgiveness for people who take jobs in government and the nonprofit sector have enablrd more youngsters to avoid paying on time.

 The federal student-loan explosion means that this is the one giant exception to the needed consumer deleveraging that has occurred since the financial crisis.  Americans have reduced their borrowing in most consumer markets.  But U.S. student-loan debt increased 11% last year to $966 billion and has skyrocketed 51% since 2008, according to the New York Fed report.  According to the Wall Street Journal, 43% of the 25-year-olds had student debt in the fourth quarter of 2012, up from about 33% in the same period of 2008.

Talk about creating systemic risk.  The New York Fed also finds that borrowers who are behind on their student loan payments are much more likely to also be delinquent on auto-loan, credit-card and mortgage payments.

All of this was predicted by those who opposed the federal takeover of student loans.  But as with so many promises that government makes, the fun comes early and the bill arrives later and is paid by someone else.