Research & Commentary

Student Loans: A Shock That Lies in Wait

The one thing that all major deflationary periods have in common is a prior build-up of societal debt that becomes overwhelming. In 2016, the number of Americans defaulting on their student loans jumped. And borrowers who are counting on the government’s student loan “forgiveness” program might be in for a shock.

 

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[Editor’s note: The text version of this video is below.]

“Why pay now… when you can pay later?”

You probably know a lot of people who think this way. Today, almost a decade after the financial crisis and Great Recession, people are again becoming comfortable with the idea of taking on debt.

And just like before, it should give you a reason to be concerned.

Here’s why: Robert Prechter’s Conquer the Crash cited a study which found that every major U.S. deflationary period was preceded by a big build-up of societal debt.

Deflation begins when the amount of debt vs. amount of income becomes too burdensome.

With that in mind, consider the steady rise in the amount of U.S. student loans. This Federal Reserve chart, updated on May 5, 2017, shows you the astronomical dollar figures:

As you can see, in just ten years, the amount of student loans has climbed from just under $500 billion to more than $1.4 trillion.

Is this sustainable?

Elliott Wave International’s April 2017 Financial Forecast noted a familiar trend:

The number of Americans defaulting on their student loans jumped by 17% in 2016. By the end of last year, 4.2 million student loan holders were in default.

But, default doesn’t cause the debt to disappear, nor do the federal government’s student loan “forgiveness” programs. Many people who borrowed to attend college will be in for a shock.

Here’s an update from EWI’s June Financial Forecast:

“Nearly half of college students surveyed earlier this year said they expected to be helped by the federal government’s various student loan forgiveness programs.” But for most former students, there is no such thing as forgiveness when it comes to government-issued student loans. According to the U.S. Department of Education, borrowers who enroll in loan forgiveness programs “would, on average, repay every penny they borrowed, and then some. Some debtors in the programs … are projected to pay as much as 76% more than they borrowed. The forgiven amount would largely be interest that accrued over what could be as long as 25 years of making payments.”

One way to escape the burden of a student loan is to get someone else to pay it for you. The idea might strike you as far-fetched, but get this (Marketwatch, May 9):

Hip hop artist Nicki Minaj caught the internet’s attention over the weekend (of May 6) for offering to help out with some of her fans’ college costs and student loans.

Here are two of Manaj’s tweets (Marketwatch, May 9):

The idea of turning to a celebrity to pay off one’s student loans puts a spotlight on the growing amount of debt, which EWI expects to get much worse.

It doesn’t take an economics degree to deduce that it’ll be tough for college graduates to find good paying jobs during the next recession, or even depression.

One can only imagine the then skyrocketing number of defaults.

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