Student loan totals in U.S. now higher than auto, credit card balances

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Since the financial crisis tore into the U.S. economy and crashed the housing market , consumers worked hard to reduce household debt and get their finances squared away.

From Q3 to Q4 2011, the total debt held by households shrank $126 billion to (a still massive) $11.53 trillion, according to the New York Fed's Quarterly Report on Household Debt and Credit . Given the severity of the housing crisis, it shouldn't surprise anyone that a lot of this decline came from falling balances on mortgages and home loans , which shrank an aggregate $134 billion from Q3. Student loan indebtedness, however, increased to a total of $867 billion.

A new report from the New York Fed entitled " Grading Student Loans " examined the trends from Q2 to Q3 2011 and concluded that student loans now represent a bigger portion of the total U.S. private debt balance than credit cards and auto loans. The report drew from Equifax and the Fed's Quarterly Report, which began publishing data in the middle of 2010.

It should surprise no one that of the 37 million student loan borrowers in the country, nearly 40 percent are under the age of 30 and nearly 67 percent are younger than 40. This cohort holds a nearly identical proportion of the total $870 billion balance, with each borrower owing nearly $30,000.

At first glance, the report offers a relatively optimistic picture of the delinquency situation, suggesting that around 10 percent of the total balance is past due in some form or another; roughly comparable, the authors point out, to other forms of debt like mortgages and credit cards. However, because so many younger borrowers haven't started paying down their loans (they're still in university, graduate programs or some other form of deferral) the figures are skewed.

The authors took these factors into account and concluded that "as many as 47 percent of student loan borrowers appear to be in deferral or forbearance periods, and thus did not have to make payments as of third-quarter 2011. Specifically, 17.6 percent of borrowers had exactly the same balance in the third quarter as in the second quarter of this year, and 29.1 percent increased their overall student loan balance by taking on new originations or accruing interest to the balance."

Of those actively repaying their loans, over a quarter hold a past due balance, while the remainder managed to reduce their total obligations from Q2 to Q3 2011.

A complex web of private decisions, market incentives and policy decisions brought the educational-financial complex to this junction. The automation, outsourcing and decline of U.S. manufacturing made it far more important to get a college degree and secure a white-collar position to build financial security . Demand for undergraduate and graduate degrees rose, so universities and colleges increased the cost of tuition accordingly while splurging on fancy facilities to attract student-customers. Indeed, many colleges took on debt and issued huge quantities of bonds to pay for student centers, athletics and dorms, and now face their own institutional crises.

At the fringes of the system, private education companies exploited the niche left by the gaps in the traditional model of overcrowded four-year undergraduate and two-year community programs. The government subsidized the massive growth in borrowing made necessary by rising tuition and stagnant wage growth. Lenders in the private sector moved in to pick up those unable to secure federal loans, and the whole leviathan churned forward, creating a new generation forced to mortgage their earnings before they ever held a full-time job.

Of course, the situation could be a lot worse - and for a picture of just how dire it could be, one only needs to look across the Atlantic at Europe (where many of the more fortunate US college borrowers will spend a semester or two). Though young Americans hold more than $580 billion in student debt and suffer from an unemployment rate of just under 25 percent, they're positively blessed compared to many young Greeks, Spaniards and Portuguese. While the latter don't have student debt to deal with, they must face an unemployment rates close to 50 percent, as Business Insider shows with this chart from Reuters . In addition, the ever-increasing strain on the common currency system threaten to undermine the entire European project and plunge the continent into economic chaos.

For U.S. debtors, the best short-term moves are to find relatively secure work and focus on paying down variable-rate and private loans before fixed-rate and government debt. Some forms of public service offer full forgiveness of federal loans after a certain period, and the armed services remain one of the surest, if most dangerous, ways to discharge the financial burden of education.

Update: ?Pat Garofalo at Think Progress summarizes the sixfold growth of education costs over the last three decades  here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Credit and Debt , US Markets

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