Student Debt: America’s $1 Trillion Time Bomb

Healthcare. Pension obligations. Student loans? A new report from Barclays helps illuminate the degree to which student-loan debt is becoming one of America’s structural challenges.

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To be sure, the firm noted that it doesn’t yet view rising levels of debt for the typical graduate as “a major issue for macroeconomic performance,” noting average debt burdens for those attending a public four-year college have risen by only $2,000 per borrower since 2000.

Still, there is increasing concern in particular about the share of debt held by students who don’t end up graduating and by older Americans, including retirees.

Further, Barclays warns the fiscal burden of defaults and income-based subsidization through 2020 is currently being underestimated by at least $225 billion.

While the actual amount of student-loan debt outstanding still has not been precisely pinned down, the Consumer Finance Protection Bureau has said it passed $1 trillion by the end of last year, and is due out with further detail by July 21. The Federal Reserve, which has separately estimated the total as at least $870 billion as of 2011, may also release a further study this summer.

In the meantime, Barclays adds the following color, aggregated from sources including the Fed and National Center for Education Statistics:

  • The growth of federal student loans outstanding in the past decade ($583 billion) is larger than the size of the government’s TARP bailout package ($431 billion).
  • Borrowers who graduated had a default rate of 3.7 percent in 2009, while those who dropped out had a default rate of 16.8 percent, and … a larger portion of the student loan debt is falling on those who will not receive the financial benefits of earning a degree.
  • Barely half of all borrowers were making payments as of the third quarter of 2011; 47 percent were either still in school or in deferral, forbearance or grace periods.
  • Given the weak labor market and increasing dropout rates, there is little reason to think that … future delinquency rates will be lower than the current national average (14 percent for all borrowers).
  • Currently, 15.5 percent of the outstanding student loan balance is held by borrowers 50 and older, and 4.2 percent is held by those 60 and older; and these age cohorts hold an even larger share (16.9 percent and 4.8 percent respectively) of the total past-due student loan balance. The average debt burden for borrowers over age 60 is $18,250.
  • The median education debt belonging to households in which the head of the household is retired increased by 62 percent between 2007 and 2009.
  • When combined with forecast growth in issuance, we estimate that the government will lose around $65 [billion] on student loans in the coming decade from subsidy rate re-estimates alone.
  • Between now and 2020, we think that IBR [the new income-based repayment programs] will cost the government a total of $190 [billion, due to write-offs].

Barclays also pointed out that “The government uses unique practices when accounting for federal loans that often make government loans seem much more profitable than comparable loans made by the private sector.”

The College Debt Crisis - See Complete Coverage
The College Debt Crisis - See Complete Coverage

It adds, however, that “We do not necessarily believe that the government should switch to the fair-value method of loan valuation, despite the magnitude of the difference…. In our view, discounting at Treasury rates is reasonable, given that it is how these projects are actually funded.”

What is clear, though, is that any increase in Treasury rates from current near-record lows will only increase the fiscal burden of student-loan debt. All the more reason to tackle the issue today.

-By CNBC's Kelly Evans