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Consumer Debt: Must Look Behind the Numbers
By Mel Miller

For a couple of years prior to the Great Recession, I shared my debt concerns during my annual Economic and Market Update presentation at the annual SRI Conference. My concern stemmed from the rising use of consumer debt to fuel a national lifestyle of “living beyond one’s means.”

Much of the economic debate of the time focused on the increasing Federal debt, but my concern centered on the consumer. Consumer spending is responsible for approximately 70% of GDP; therefore, if the consumer was approaching an economic “day of reckoning,” the economic fallout from deleveraging could be significant.

For a long time, this concern was not widely shared by economists because a huge portion of overall consumer debt was composed of mortgage debt. Of course that was when economists, bankers, and Wall Street analysts all believed that houses only increase in value! Now we know differently.

The debt service ratio graph highlights that required debt payments as a percent of disposable income approached 14% just before the onslaught of the great recession—an all-time high. The decline from the high, to today’s level has also been historic. Consumers have not only been eliminating debt, many have been able to refinance existing home debt. For many consumers, personal balance sheets have improved greatly—debt is lower and the interest rate on their home mortgages has also been reduced.

Based on a debt service ratio of less than 10%, the consumer is now in a position to take on additional debt to drive the economy forward. With an expanding debt capacity, rising stock market values, and low interest rates, shouldn’t the future economic growth be above normal?

To answer the question one must look behind the numbers. “On the other hand” is a favorite saying of economists’ and applies appropriately in this case. Included in total debt are student loans and therein lies the “other hand.”

Student Loan Debt Explodes

On March 30, 2010 President Obama signed the Student Aid and Fiscal Responsibility Act which, in effect, made the U.S. Department of Education the lender of all student loans on a going-forward basis. Colleges now act as the middleman, working with students to complete the necessary paperwork to obtain a loan from the Department of Education.

Student loan debt has exploded since the public sector took over the program. Since the Act was signed into law, government-issued loans have increased from approximately $200 billion to over $700 billion in just three years! Adding the outstanding balances of the private sector loans issued prior to July 1, 2010 to the government balances pushes the total to over $1.1 trillion—more than current credit card debt.

Not only are balances exploding, delinquencies are on the rise. In fact, delinquencies rose nearly 12% in the third quarter of 2013, and now stand at a whopping 14%, according to the Federal Reserve Bank of New York. Other consumer credit categories are improving, while student loan delinquencies continue to rise.

Critics of the program are concerned about the $85 billion in past due loans. Others are frustrated that many graduates are now being treated as indentured slaves because the law does not allow for the debt to be extinguished in a bankruptcy proceeding unless strict hardship conditions are met.

Proponents of the program point to the $41.3 billion “profit” in fiscal year 2013 reported by the Federal Government. Even though the profit was down from the $44.9 billion reported in 2012, the profit is greater than any company reported in 2013, except for Exxon and Apple.

Critics say the profit is illusionary. In fact, if private sector “fair value” accounting methods were used rather than government cost accounting rules, the program would be a net cost to taxpayers. It’s important to note that if the profit was actually near the $41.3 billion, it’s highly likely that the private sector would develop a program to compete with the government-run program.

If the growing balances were the result of more students gaining additional education, society would likely be the beneficiary. A highly educated workforce is an asset to society as more educated workers produce higher income and pay more taxes—assuming jobs are available after graduation. But lack of jobs is a real problem. According to a recent study by the Bureau of Labor Statistics, the unemployment rate of recent college graduates is approximately 13%, well above the headline unemployment rate. Even the 13% understates the problem because many recent college grads are forced to accept jobs outside their field of study.

Given the high cost of education, 60% of college students annually borrow to help cover costs. The average student loan debt is now $24,301, with 4% of college students graduating with over $100,000 in debt to repay. No doubt the economic recovery is being slowed as recent college graduates struggle to meet required debt payments rather than buying homes, cars, or other big ticket items.

Past generations saw the road to a better life resulting from a college degree. Unfortunately, that road is now filled with potholes.


First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?


Mention of specific companies or securities should not be considered a recommendation to buy or sell that security. Past performance is no guarantee of future results.


Posted: March 3, 2014