Much has been made about ballooning student loan debt and the rise of delinquencies.
Many have called this a bubble, and some have even declared that the bubble has burst.
But Capital Economics’ Paul Ashworth isn’t convinced we need to be freaking out about this just yet.
First, while he acknowledges that student loans have been on the rise, he points out that this is largely due to more young people going to school and he also notes that the growth rate has been decelerating.
“The growth rate of student loans has been on a long-term downward trend, while the contraction in other types of household debt has eased,” he writes. “Both of these developments are positive.” Here’s his chart.
Capital EconomicsSecond, he believes that the recent jump in delinquency rates may not be as big as everyone thinks. From Ashworth:
The dramatic jump in the delinquency rates for student loans is, at first glance, alarming. (See Chart 2.) But we suspect this jump owes more to a change in the definition the New York Fed uses to determine whether a loan is delinquent or not, which wasn’t applied to the historical data.
The sudden spike in student loan delinquencies in the second quarter of last year makes little sense given the downward trend in the overall household debt delinquency rate. The key determinants of delinquencies are the unemployment rate and interest rates. But the unemployment rates for 20 to 34 year olds have been trending lower and interest rates have also fallen.
Here’s a chart showing that spike.
However, where Ashworth is encouraged by the falling unemployment rate, Goldman Sachs’ Jan Hatzius notes that the labour force participation rate of college-eductated young Americans has plunged.
Regardless, this is an interesting take by Ashworth.
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