Millennial Double Whammy

The Millennial double-whammy = debt + no income

Harvard: Just 6 in 10 Millennials have jobs, half are part-time - Paul Bedard

A comprehensive new Harvard University report on Americans under 30, the so-called Millennials, shows that the economy is having a crushing impact, with just 62 percent working, and of those, half are toiling at part-time jobs.

The report, released by Harvard's Institute of Politics, paints a depressing economic portrait of young Americans, many of whom are stuck with huge college tuition bills and little chance of finding a high-paying job.

But over half, or 59 percent of those aged 18-29, have gone to college and The report reveals that time in college is a better sign of social status than income, mostly because jobs aren't available.

Check list for those just starting out:

[ ] Learn the word "retrench"
[ ] Avoid debt
[ ] Find a lucrative career-path (whether you go to college or not)
[ ] Start saving

Student Loan Bubble

Here is a perfect example of the law of unintended consequences. The original problem is that college education is expensive. The government intends to solve this problem. The "solution" is to provide easy loans to students so that they don't have to worry about paying tuition while enrolled. This increases demand for enrollment. College administrators, being rational actors in a free market, increase tuition accordingly.

Note that all of the incentives are in favor of initiating the loan. Lenders love it because the loans are non-bankruptable and they get their fees up front. Colleges love it because they are seeing both increased enrollment and increased tuition rates. They now have extra money to spend on all the great programs and projects they have been dreaming about. And besides, high tuition rates bring prestige to the college, and that is always a good thing. Government bureaucrats love it because they get to be the heroes. Parents love it because they get to enroll their child without having to worry about affordability. Even students love it initially.

But eventually the loan is just a loan and not a grant. It must be repaid. And unfortunately it must be repaid when the new graduate is just starting out in a career (assuming they have graduated and were wise enough to actually prepare for a career). Even without student loan debts, this is a period of increased financial pressure due to housing, transportation, food and medical costs now being borne directly by the graduate.


Screw U. Government inflated the college loan bubble, but Obama isn’t fixing it - Glenn Harlan Reynolds

The real problem is that we’ve been running a higher education bubble, one that -- like the real-estate bubble -- has been pumped up by cheap government money. Since 1999, student loan debt has increased by 511%, while disposable income has increased by only 73%.

That’s because when the government subsidizes something, producers respond by raising prices to soak up as much of the subsidy as they can. College is no exception. Tuition has been increasing much faster than disposable income, and families -- believing that a college education is a can’t-lose investment, much as they used to think houses were -- have been making up the difference with debt. After all, we’re told, student loan debt is “good debt,” because a college degree guarantees more earnings.

Tell it to the Occupy Wall Street protesters, many of whom note that they’re deep in debt for fancy degrees that didn’t get them jobs.

The problem is, “college” isn’t an undifferentiated product. Companies can’t hire enough mechanical engineers, but there’s no bidding war for majors in Fine Arts or Women’s Studies, degrees that cost just as much, but deliver a lot less in terms of employment. In an economically rational market, it would be harder to borrow money to finance fields of study that were unlikely to produce enough income to pay back the loans. But since the federal government subsidizes everything -- and makes student loans un-dischargeable in bankruptcy -- there’s no incentive for lenders to care, and even less incentive for colleges and universities to care. They get their money up front, after all -- just like the people who wrote the subprime loans that fueled the housing crisis.

Chart of the Day: Student Loans Have Grown 511% Since 1999 - Daniel Indiviglio

Obviously the number of students didn't grow by 511%. So why are education loans growing so rapidly? One reason could be availability. The government's backing lets credit to students flow very freely. And as the article from yesterday noted, universities are raising tuition aggressively since students are willing to pay more through those loans.

This student loan growth sure looks unsustainable. But it's hard to see how this bubble's inevitable pop might look. Ultimately, it might look more like a balloon slowly deflating, if a large portion of college graduates decide to strategically default on their debt over time.

All this college debt could put the U.S. on a slower growth path in the years to come. As Americans grapple with high student loan payments for the first few decades of their adult lives, they'll have less money to spend and invest. All that money flowing into colleges and universities is being funneled away from other industries where it would have been spent in future years. Of course, this would be a rather unfortunate irony: higher education is supposed to enhance a nation's growth, but with such an enormous debt burden, graduates might not be able to spend and invest enough to allow that growth to occur.

Some great charts at the Federal Reserve Bank of New York.

Rather than rack up a bunch of debt, maybe just go to MIT for free.

More free online resources: 12 Dozen Places To Educate Yourself Online For Free

The Economy - October 2011

This is just the beginning. Things are going to get worse before they get better. Americans need to follow some good old-fashioned advice:

• If you're in debt, pay off your debts.
• If you're out of debt, do not borrow.
• If you're having trouble making ends meet, reduce your overhead.
• If you're unemployed, acquire some marketable skills asap, or start your own business. Do not rest until you get some cash-flow.
  
• If you're earning money, set some aside for the future.
  
• If you're going to college, pay as you go. Under no circumstances enroll in a college you cannot afford. And while you're there, gain some knowledge that will get you started on a rewarding career.
• Have some self-respect: Do not depend on the government to take care of you, and don't mooch off of friends and relatives.
• Create wealth through your own productive labor (including mental labor). Labor is only productive if someone is willing to exchange cash or services for it, or it increases your personal capital.
• Don't vote for politicians who promise to give you something. They are con-artists and thieves.

A long, steep drop for Americans' standard of living - Ron Scherer

What has led to the most dramatic drop in the US standard of living since at least 1960? One factor is stagnant incomes: Real median income is down 9.8 percent since the start of the recession through this June, according to Sentier Research in Annapolis, Md., citing census bureau data. Another is falling net worth – think about the value of your home and, if you have one, your retirement portfolio. A third is rising consumer prices, with inflation eroding people's buying power by 3.25 percent since mid-2008.

Scary Budget Fact of the Day - Peter Suderman

The United States will officially pass the 100 percent debt-to-GDP line on Halloween. Via Zero Hedge:

October 31, elsewhere known as Halloween. Yes, ladies and gentlemen: All Hallows E'en will be doubly scary this year: for the first time since World War II, US debt will officially surpass GDP on Halloween 2011.

Student Loan Bubble To Exceed $1 Trillion: "It's Going To Create A Generation Of Wage Slavery" And Another Taxpayer Bailout - Tyler Durden

USA Today reports once again on one of its favorite subjects, student loans are set to surpass $1 trillion in total notional for the first time in history on what appears to be relentless demand and interest for this cheap form of educational financing, making this debt burden the single largest form of consumer debt, well bigger than outstanding credit card debt, and smaller only compared to mortgage debt. "The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards."

...

So... debtors know it's a bubble, lenders know it's a bubble, everyone knows it's a bubble, yet it is growing faster now than ever before.

College and Debt

Higher Education Bubble Update - Glenn Reynolds

Here’s what [Florida Gov. Rick] Scott said:

You know, we don’t need a lot more anthropologists in the state. It’s a great degree if people want to get it, but we don’t need them here. I want to spend our dollars giving people science, technology, engineering, math degrees. That’s what our kids need to focus all their time and attention on. Those type of degrees. So when they get out of school, they can get a job.

Even at Mother Jones we hear: “Scott’s reasoning could attract a lot of Floridians.” Ya think? But there’s this, too: “Is a degree’s intrinsic value really reducible to its marketability?”

After decades of selling college as an “investment” — and pricing it accordingly — it’s going to be hard for the higher education establishment to pivot to a college-as-personal-fulfillment argument. If it’s the latter, it’s a consumption good, priced on a par with a Porsche or Ferrari. Those shouldn’t be financed by debt, or bought by 18-year-olds. If college liberal-arts degrees, on the other hand, are to be sold as a public good, benefiting society so much that society should pay the freight, then (1) Society should have a much bigger say in what’s being taught; and (2) It might be nice to see some actual, you know, evidence of that. Also, students should be warned up front that they’ll be spending 4 years (or 5, or 6) of their lifespan doing something that’s good for society. The trust-funders may be okay with that, but that’s not a lot.

Employment and Recent Graduates

Survey: 85% of New College Grads Move Back in with Mom and Dad - Erica Ho

Thanks to a high unemployment rate for new grads, many of those with diplomas fresh off the press are making a return to Mom and Dad's place. In fact, according to a poll conducted by consulting firm Twentysomething Inc., some 85% of graduates will soon remember what Mom's cooking tastes like.

Times are undeniably tough. Reports have placed the unemployment rate for the under-25 group as high as 54%. Many of these unemployed graduates are choosing to go into higher education in an attempt to wait out the job market, while others are going anywhere — and doing anything — for work. Meanwhile, moving back home helps with expenses and paying off student loans.

Mortgage Debt

Homeownership and Mortgage Debt - Mark A. Calabria

From 1990 until today, the percentage of mortgage debt to value increased by over 50%, all to gain a 2 percentage point increase in homeownership. So it seems the story of the last 20 years has been a massive increase in home debt with very little increase in actual homeownership rates.