The 10th Man

What Comes After a Trillion?

February 28, 2019

Headline in Bloomberg the other day:

“Millennials Are Facing $1 Trillion in Debt.”

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A trillion always sounds like a lot. It is a lot.

But while the absolute number is large, that is not the issue. The issue is the composition of this millennial debt. It’s mostly student loans, and a staggeringly high amount of these loans are in delinquency.

And this is at the top of an expansion!

As I’ve said a half a million times, debt kills. People contemplate suicide over debt. Usually because it’s gambling debt that they welched on, and they are about to get their legs broken. But also because some people have so much student loan debt that they’re 29 years old and it’s already checkmate.

On a societal level, imagine what happens if we hit a rough patch in the economy and these student loans—which are already 10% delinquent—go to 40% delinquent?

Revolution.

I don’t want to get all Book of Revelation on you, but debt historically led to war and inflation and autocracy.

Once you know that, you develop a healthy respect for debt and the destruction it can cause.

Wall Street folks often view debt as a numerical abstraction. Like, if the default rate rises to 6%, then high yield spreads over Treasurys will go from 300 to 700 over.

That’s the kind of gearhead stuff most analysts talk about. I recognize the opportunities that it will create in the corporate bond market, but I’m also conscious of the impact on human beings when people apply too much leverage.

Again: debt kills.

     
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Millennials

In the case of millennials, they made decisions to take out student loans when they were too young to make these decisions.

Someone in the Bursar’s Office stuck a form in front of them and said “sign here,” and without a second thought, these 18-year-olds signed their future right down the drain.

Borrowing money to go to school is shockingly easy. Borrowing money to buy a house is very hard. That probably explains the difference in the delinquency rate.


Source: Bloomberg

When millennials say that it isn’t their fault and the debt should be forgiven, they’re half right. They’re guilty of having a high agreeableness score and shocking levels of innumeracy, but they’re not deadbeats any more than any other generation are deadbeats.

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And they’re not any more prone to profligacy. In fact, student loan debt has crowded out other kinds of debt, notably, mortgage debt. They can’t get a mortgage, which means they can’t build equity, which means they can’t take part in the greatest savings program known to mankind.

Nobody does this deliberately. If I were contemplating taking out six figures in student debt, I would build a spreadsheet to figure out how long it would take me to pay it back. 99.9% of these people do not do this.

Are they wrong? Or do we just need to lower expectations?

This talk about forgiving student loan debt is dumb (because remember, you have to respect the rights and property of the lender).

If I were running this hamburger stand, I would work to compel student lenders to enforce the same sorts of credit standards that banks do when they issue mortgages. Naturally, that would result in fewer people going to college—or, at least, to expensive colleges.

That is okay! It would force colleges and universities to think a little harder on the sprawling bureaucracies they’ve built for themselves, along with the 5-star accommodations. The University of Michigan famously employs 93 full-time diversity staff, the top 26 of which make six figures.

Yes, college could be cheaper.

The Way Out

My colleague John Mauldin talks about debt a lot. He talks about it more from a macro perspective. Lately, I have been focusing on it from a micro perspective.

The national debt is huge, and growing, and is a problem. At our current trajectory, and unless we take corrective action, we will also be in checkmate.

Having said that, there may not be tangible economic effects for a while. Deficits do matter, but with a very long lag.

If a household goes into debt, the effects are not lagged—they are immediate.

Even if a recession doesn’t happen, the absolute best-case scenario is that people limp along with crushing debt service, crowding out consumption and investment. People live in poverty, retire in poverty, and die in poverty.

You might think this is a funny time to get revved up about debt, especially because in last week’s issue, we showed that debt service as a percentage of disposable income has dropped to an all-time low.

This is a personal mission of mine. I talk to people and I hear stories about how debt constrains behavior. It sucks up all the free cash flow. I bet if people had an extra $1,000 a month in free cash flow, they’d at least find something fun to do with it.

I paid off what was left of my debt two months ago. Tomorrow is the first of the month—no mortgage payment! Sublime.

I hope one day everyone gets to experience the same feeling of liberation.

Jared Dillian
Jared Dillian

 

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Comments

Daniel Svensson

Feb. 28, 7:26 p.m.

Hi Jared.  During the last recession a whole lot of people who lost their jobs decided to go back to school, in part because folks who couldn’t borrow money anywhere else could get student loans over and above tuition to cover living expenses.  There was also a proliferation of “for profit universities” that preyed on unsophisticated students of all ages by loading them up with student loans to pay the obscene tuition rates.  The pitch was you didn’t have to make payments as long as you were in school, and even after you graduated you could get forbearance for additional time to pay. I was working as a tax preparer in Florida from 2009-2013 and saw a never-ending line of customers with 1098-T forms documenting huge amounts of tuition (far more than they would pay at University of Florida, Florida State, UCF, or any other state sponsored school) filing for their American Opportunity Credit ($1000 of which was refundable). Many of those for profit universities have since gone under (usually after getting booted from the federal student loan program) leaving their students with no degree, credits that won’t transfer and a ton of student loan debt. In the grand scheme I suspect the number of students enrolled at these for profit universities was relatively small, but I’m sure their delinquency rates are staggeringly high (north of 80% I would guess) so even if they were only 10% of the total it’s certainly enough to move the delinquency needle.

You are doing great work Jared.  I firmly believe Personal Finance should be a required course for any undergraduate degree regardless of major.  Go Bears!

Robert Watkins

Feb. 28, 3:50 p.m.

But hey, many liberal progressives think we need not worry about debt. We can do as Japan, print, print, print, buy back, buy back, buy back our debt,  and have absolutely no consequences! My opinion is this, the reason we’ve seen few consequences is because the hold world is in huge debt. And as John has often said, “we are the cleanest dirty shirt in the closet,” Japan is right there with us!  When people lose faith because of our staggering debt, it will happen overnight! Those who have much personal debt will suffer greatly! But then again, maybe the people they owe the money to,  will suffer even more!

Scott Crocker

Feb. 28, 2 p.m.

Bubbles are caused by easy money and laws that hide the real economics of decisions. College education is in a 30 year bubble of massive proportions. Easy money for universities has resulted in ridiculous economic decisions. It’s not that people don’t need a college education. Many do, just as many people need a house, but a broken system leads to bubbles that hurt people. The difference between this bubble and housing is the law that protects lenders from the bankruptcy of borrowers. The housing bubble lasted a few years, caused much pain, but is now mostly over. The college education bubble started before the housing bubble and could drag on for decades because this law prevents economic accountability. Removal of this law is the only solution I see - it will still be intensely painful, but otherwise the bubble will last a long time until something else in society breaks from the strain. Maybe revolution as Jared mentioned.

Dave Rebol

Feb. 28, 11:29 a.m.

Jared,

I know of several kids who borrowed student debt to party and live on. They never even went to register. The problem really blew up when Obama nationalized the student loan program. Of course, the solution will be to expand it more, and let taxpayers pay for kids to play.

ssnyder2@woh.rr.com

Feb. 28, 10:28 a.m.

Jared,

My wife and I just became mortgage and debt free after 35 years of marriage and raising 2 children. We started with nothing and were given nothing, but we had the same mindset as you when it came to hard work, saving, investing, and living modestly.  I retired at age 53 and began farming for friends to keep busy and help them out. We are now in the process of selling some of our real estate investments, the proceeds of which will be added to our portfolios at Vanguard. Looking forward to some traveling, interacting with family, hobbies, and no debt worries. America is truly the land of opportunity for those who choose to embrace it, and it should be protected at all costs.  I enjoy your writings…thanks.

Steve

Theodore Blake

Feb. 28, 9:22 a.m.

Nice piece.

I am truly alarmed at how little discussion there is about the *ACTUAL* cost of college, and the fact that it continually outpaces GDP/inflation by hundreds of bps per year for generations.

It’s grown almost as fast as HC costs, and is equally a threat to our quality of life.

Yet politicians, particularly on the left, only seem to want to talk about finding MORE subsidies for college costs, rather than forcing universities to reexamine the way they deliver education.