Student Debt Could Be Next Financial Bubble to Burst

Moody’s Warns Student Loans May Be The Next Financial Bubble To Burst

Student Debt Sucks

First Posted: 8/9/11 06:25 PM ET Updated: 8/9/11 06:37 PM ET, The Huffington Post

WASHINGTON — Record borrowing by college students who are graduating without jobs may lead to the next financial crisis, according to a recent report by Moody’s Analytics.

“The long-run outlook for student lending and borrowers remains worrisome,” concluded the report, which came out in July.

“Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the broader economy. … [T]here is increasing concern that many students may be getting their loans for the wrong reasons, or that borrowers — and lenders — have unrealistic expectations of borrowers’ future earnings.”

 

 

The Moody’s report points to the fact that student loan volume growth, unlike other lending, has accelerated during the recession. This is due in part to people seeking more education and retraining as well as some students opting to remain in college longer to avoid poor job prospects.

The report indicated that in addition to college enrollment tripling over the past four decades, “demand [for student loans] is driven by the cost of education, which has grown at an extraordinary rate over the past three decades.” Based on Consumer Price Index data, the cost of tuition and fees has more than doubled since 2000, and has outpaced inflation across all goods, health care, housing and energy.

Student lending has also increased due to state governments making cuts to their public education institutions, causing colleges to raise tuition. Further, college endowments have recovered slowly throughout the economic downtown, forcing schools to increase tuition and limiting the amount of in-house money for scholarship use.

The student loan debt load now outpaces credit card debt, and according to Mark Kantrowitz, who publishes the financial aid websites Fastweb.com and Finaid.org, the average 2011 college graduate carries $27,200 in student debt.

“Fears of a bubble in educational spending are not without merit,” the Moody’s report said.

Using consumer credit data from Equifax, Moody’s noted the original borrowing amounts taken out by students have risen significantly over the past two years.

For-profit schools, which have much lower graduation rates than traditional colleges, have also grown rapidly.

Youth unemployment among those under the age of 24 has been much higher than the rest of the workforce — creating an even more pessimistic outlook for student loan repayment. In the U.S., it was over 15 percent for the first quarter of 2011, and is similarly problematic around the world.

However, the report notes there could be negative implications if people take out fewer loans, when that is their only means to attend college. In the short term, if fewer people pursue higher education and avoid student debt altogether, it would cause a drag on consumption. In the long term, a less educated workforce would put the U.S. at a disadvantage.

With the changes coming to student loans by the recent debt ceiling agreement, some college students will inevitably see even more debt by the time they graduate.

In the Budget Control Act of 2011, the agreement to raise the debt ceiling, subsidized federal student loans were put on the chopping block. Beginning next July, graduate and professional students — those who already have bachelor’s degrees and seek masters or doctorates — would be charged interest while in school. According to Finaid.org, this would potentially increase students’ total debt by graduation by 16 percent.

The cuts to federal student loans were redirected toward shoring up Pell Grants. After the details were announced, Pauline Abernathy, vice president of the Institute for College Access & Success, expressed concern for the more than nine million students who utilize Pell grants.

“Even with a Pell Grant, recipients are more than twice as likely as other students to have to take out student loans, and they graduate with significantly more debt than other students,” Abernathy said in a statement last week.

According to the Associated Press, the promise of further cuts from the “super committee” — formed as a result of the debt ceiling agreement — raises concerns of reductions in tax breaks to offset the cost of college and the low interest rates of federal student loans.

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Dow Jones Down 634.7 Points

Dow closes down 634 points after final plunge [Updated]

August 8, 2011 |  1:12 pm, Los Angeles Times

Markets8-blog

 

The Dow Jones industrial average finished the day down 634.76 points Monday after a full-day sell-off accelerated in the final hour of trading as investors struggled to absorb Standard & Poor’s decision to downgrade the United States’ credit rating.

[Updated, 1:34 p.m. Aug. 8: This post has been updated to reflect the final closing numbers of the Dow Jones industrial average.]

Investors piled out of stocks and into a few “safe havens,” such as gold and Treasury bonds. The appetite for Treasury bonds suggests that the Standard & Poor’s downgrade has not shaken investors’ faith in U.S. bonds.

Market experts said the Monday sell-off was sparked by the S&P announcement but was motivated more by growing concerns about the weakness of the global economy.

“It’s really all about economics,” said Mike Norman, the chief financial strategist at John Thomas Financial.

The Dow ended the day down 634.76 points, or 5.5%, at 10809.85. The broader Standard & Poor’s 500 index fell even more sharply, finishing the day down 79.83 points, or 6.6%, at 1119.55.

“It’s been harried,” said Sal Arnuk, head of Themis Trading, which has its trading floor in Chatham, N.J.

The concern about the U.S. credit rating was amplified when Standard & Poor’s announced Monday morning that it was also downgrading the debt of mortgage giants Fannie Mae and Freddie Mac, which rely on U.S. government guarantees. But traders said much of the pessimism Monday resulted from broader concerns about the economy.

“I don’t think the S&P announcement is the lead director of the day — I just think it is the icing on the cake,” said Jonathan Corpina, a trader on the New York Stock Exchange for Meridian Equity Partners.

Markets have fallen nearly every day for the last two weeks and are now down to levels last reached in September of last year.

With the United States’ credit risk being judged lower by Standard & Poor’s, Treasury bonds might have been expected to lose some of their luster. But  investors still appear to be using Treasuries as a haven amid global economic turmoil. The 10-year Treasury bond was trading at a 2.34% yield, down from 2.56% on Friday, indicating that there was heavy demand for the bonds.

Gold, another haven, saw its value rise nearly 3.9% on Monday.

Goodbye, AAA

8 August 2011 Last updated at 11:34 ET, BBC News

US unlikely to regain AAA rating soon, says S&P

The US is unlikely to see its long-term credit rating return to AAA any time soon, ratings agency S&P has said.

Its comments came as it downgraded the state-backed mortgage giants Fannie Mae and Freddie Mac because of their “direct reliance on the US government”.

It also lowered ratings for clearing houses and other institutions linked to long-term US debt from AAA to AA+.

Late on Friday, the agency downgraded the US’s top-notch AAA rating for the first time in its history.

But US Treasury Secretary Timothy Geithner criticised the decision.

“I think S&P has shown really terrible judgement and they’ve handled themselves very poorly, and they’ve shown a stunning lack of knowledge about basic US fiscal math,” Mr Geithner told NBC on Sunday.

“I think they drew exactly the wrong conclusion.”

‘Polarised views’

In a conference call on Monday, David Beers, S&P’s head of sovereign ratings, said: “We still think that the risks to the rating are still pitched to the downside – that’s why we have a negative outlook. We don’t anticipate a scenario at the moment in which the US would quickly return to AAA.”

He went on: “If [there were] broader consensus among parties about how to make fiscal policy choices over the medium-term horizon and in turn that translated into a more substantial and more robust fiscal stimulation package, those two things could together in time lead to the rating returning to AAA.

“But given the nature of the debate currently in the country, with the polarisation of views across the country right now, we don’t see anything immediately on the horizon that would make this the most likely scenario.”

US markets were lower on Monday in the first trading session after S&P downgraded the US economy.

The Dow Jones was down 2.4%, while the Nasdaq fell 3.2%

America’s Debt Broken Down

Who Owns America? Hint: It’s not China

July 23rd, 2011
By Thomas Mucha
The Global Post

Truth is elusive. But it’s a good thing we have math.

Our friends at Business Insider know this, and put those two principles to work today in this excellent and highly informative little slideshow, made even more timely by the ongoing talks in Washington, D.C. aimed at staving off a U.S. debt default.

Here’s the big idea:

Many people — politicians and pundits alike — prattle on that China and, to a lesser extent Japan, own most of America’s $14.3 trillion in government debt.

But there’s one little problem with that conventional wisdom: it’s just not true. While the Chinese, Japanese and plenty of other foreigners own substantial amounts, it’s really Americans who hold most of America’s debt.

Here’s a quick and fascinating breakdown by total amount held and percentage of total U.S. debt, according to Business Insider:

Hong Kong: $121.9 billion (0.9 percent)
Caribbean banking centers: $148.3 (1 percent)
Taiwan: $153.4 billion (1.1 percent)
Brazil: $211.4 billion (1.5 percent)
Oil exporting countries: $229.8 billion (1.6 percent)
Mutual funds: $300.5 billion (2 percent)
Commercial banks: $301.8 billion (2.1 percent)
State, local and federal retirement funds: $320.9 billion (2.2 percent)
Money market mutual funds: $337.7 billion (2.4 percent)
United Kingdom: $346.5 billion (2.4 percent)
Private pension funds: $504.7 billion (3.5 percent)
State and local governments: $506.1 billion (3.5 percent)
Japan: $912.4 billion (6.4 percent)
U.S. households: $959.4 billion (6.6 percent)
China: $1.16 trillion (8 percent)
The U.S. Treasury: $1.63 trillion (11.3 percent)
Social Security trust fund: $2.67 trillion (19 percent)

So America owes foreigners about $4.5 trillion in debt. But America owes America $9.8 trillion.

It Wasn’t So Bad When Bush Was Doing It…

During Bush Presidency, Current GOP Leaders Voted 19 Times To Increase Debt Limit By $4 Trillion

By Travis Waldron on Apr 14, 2011 at 11:49 am, ThinkProgress

After pushing the government to brink of shutdown last week, Republican Congressional leaders are now preparing to push America to the edge of default by refusing to increase the nation’s debt limit without first getting Democrats to concede to large spending cuts.

But while the four Republicans in Congressional leadership positions are attempting to hold the increase hostage now, they combined to vote for a debt limit increase 19 times during the presidency of George W. Bush. In doing so, they increased the debt limit by nearly $4 trillion.

At the beginning of the Bush presidency, the United States debt limit was $5.95 trillion. Despite promises that he would pay off the debt in 10 years, Bush increased the debt to $9.815 trillionby the end of his term, with plenty of help from the four Republicans currently holding Congressional leadership positions: Speaker John Boehner, House Majority Leader Eric Cantor, Senate Minority Leader Mitch McConnell, and Senate Minority Whip Jon Kyl. ThinkProgress compiled a breakdown of the five debt limit increases that took place during the Bush presidency and how the four Republican leaders voted:

June 2002: Congress approves a $450 billion increase, raising the debt limit to $6.4 trillion. McConnell, Boehner, and Cantor vote “yea”, Kyl votes “nay.”

May 2003: Congress approves a $900 billion increase, raising the debt limit to $7.384 trillion. All four approve.

November 2004: Congress approves an $800 billion increase, raising the debt limit to $8.1 trillion. All four approve.

March 2006: Congress approves a $781 billion increase, raising the debt limit to $8.965 trillion. All four approve.

September 2007: Congress approves an $850 billion increase, raising the debt limit to $9.815 trillion. All four approve.

Database searches revealed no demands from the four legislators that debt increases come accompanied by drastic spending cuts, as there are now. In fact, the May 2003 debt limit increase passed the Senate the same day as the $350 billion Bush tax cuts for the wealthy.

When Bush was in office, the current Republican leaders viewed increasing the debt limit as vital to keeping America’s economy running. But with Obama in the White House, it’s nothing more than a political pawn.