CHICAGO, June 6, 2013 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog includeBarclays Plc. (NYSE:BCS), Nomura Holdings Inc. (NYSE:NMR), Bank of America Corp. (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and SLM Corporation (Nasdaq:SLM).
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Here are highlights from Wednesday's Analyst Blog:
Student Loans: The Next Frankenstein?
While the U.S. economy is taking baby steps to return to normalcy with a rebound in the housing market and a continuous uptrend in stock prices across most indices, a staggering student debt burden of over $1 trillion is waiting to explode into a full-blown crisis and drag down the economy. To make matters worse, student-loan debt has even exceeded credit card and auto loan debt, with delinquency levels exceeding all forms of debt.
Highly delinquent mortgage loans had earlier led to a sub-prime mortgage crisis, which led to the collapse of several financial giants like Lehman Brothers and Merrill Lynch. While Britain'sBarclays Plc. (NYSE:BCS) and Japan'sNomura Holdings Inc. (NYSE:NMR) separately acquired the operations of Lehman Brothers, Merrill Lynch was acquired by Bank of America Corp. (NYSE:BAC). Several other leading banks like JPMorgan Chase & Co. (NYSE:JPM) also felt the after-effects of the prolonged recession.
Thus the obvious question now is whether student loan debt is the next 'Frankenstein' in the making for the U.S. economy? This trillion-dollar question might sound odd, but the reasoning behind it may lead us to give it a serious consideration.
What Led to the Debt Pile?
Rapid strides in globalization and technological advancements have gradually affected careers and wiped out many mid-level professional jobs -- Darwin's principle of 'survival of the fittest' emerges again. This has led the larger pie of the 'bottom of the pyramid' Americans to opt for a four-year college degree so that they are equipped with a professional grade and have specialized skill-sets to have an edge in the competitive job market.
According to National Center for Education Statistics (2012) data, the cost of an average four-year college stint for tuition, lodging and boarding has presently skyrocketed to about $22,000 a year from under $9,000 (adjusted for inflation) in 1980-81. However, median family income has remained relatively stable at about $50,000, compared to $46,000 in 1980 (adjusted for inflation). In order to bridge this gap, most students end up taking high loans with expectations of higher earnings and steady employment after passing college.
However, the dearth of new jobs has compelled a large section of students to remain unemployed. Moreover, the recession has also driven most states to adopt austerity measures and budget cuts, which in turn has resulted in fewer grants for college and increased tuition fees for students.
The easy availability of loans from diverse companies such asSLM Corporation (Nasdaq:SLM) has further served as an enticement for students to take the plunge as the federal government has emerged as the prime lender with lesser credit requirements and reduced monthly repayment facilities.
Consequently, student loan debt has reportedly increased by 13.9% annually from 2005 to 2012. However, panic buttons were pressed only when it hit the trillion-dollar mark.
The Implications
The huge pile of student debt has robbed the economy of potential first-time home buyers, the bulk of which are between 25 and 34 years old. A healthy housing market augurs well for the overall economy and is one of the leading indicators of economic growth.
However, already saddled with a mountain of debt, most young buyers fail to qualify for home loans; even those who do qualify are often reluctant to take on another large monthly payment. The vicious cycle is thus repeated – dearth of demand in the housing market impedes economic growth and leads to lack of jobs. The decision to buy other big-ticket items such as cars is also being deferred, thereby weakening other possible growth drivers for the economy.
Statistics reveal that over 40% of around 40 million student loan borrowers across the country are 25 years old with an average outstanding loan of $25,000. Unless this huge demographic segment repays the debt, their credit score will not improve and they won't be able to get any credit in the future.
And deciding to pay off all student loan debt would perhaps rob them of the ability to afford anything else with the shrinking job market and reduced discretionary income. The Catch-22 situation for college graduates is further aggravating the problem with rising delinquency levels.
Unlike other forms of debt, student loans are unsecured and do not have collateral attached to it. This might also be a significant factor behind mounting defaults.
Taxpayer's Money at Stake Again?
With changing regulatory landscape following the latest recession, bad debts and loses due to write-downs of credit card and mortgage debts could fall upon banks and financial institutions, but student debt solely relies on the government for a bailout. Will it be worthwhile to shoulder such a huge debt burden and put the taxpayer's money at risk while the economy is aiming toward a full recovery?
The Trigger
The impending crisis could be triggered as early as July 1, when interest rates on student debt is set to double from 3.4% to 6.8%, without any intervention by the government. This would escalate interest costs from $7,965 to $12,598.
The Democrats are currently working on a plan to freeze the interest rates for the next two years. On the other hand, the Republicans have passed a bill to link the interest rate to a market-based system which is recalculated every year, subject to a cap of 8.5%. However, the White House has threatened to veto it, citing increased interest burden and uncertainty for the larger mass of the student community.
The Epilogue
Preparators of the argument in favor of reducing the interest burden or even waving of some of the loans have argued that if profit-making entities like banks can avail loans through the Federal Reserve at discounted interest rates of 0.75%, the students should also get the same benefit to hone their education and learning skills and develop the human capital of the country.
Until then, the looming debt obligations are delaying enrollments for students or even forcing non-enrollments in some cases, as college degree that was once synonymous with academic finesse and workforce readiness has now become synonymous with debt and under-employment
Can the economy afford to sustain such a loss to the human capital or will it be just to incur a short-term loss by waving of the loans for a long-term benefit?
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