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Student Loans Are a Societal Problem, Not an Economic Threat: Economist

Student Loans Are a Societal Problem, Not an Economic Threat: Economist

Last week JPMorgan (JPM) announced it was exiting the student loan business next month. The bank sees both growth and profit opportunities in the student loan business shrinking as the government continues to take effective control via Sallie Mae. Private banks have been leaving the industry in droves since 2010 when the government cut banks out of the student aid process.

Profitable or not student loan debt has doubled since 2007. There is currently somewhere around $1 trillion of student debt outstanding. According to research conducted by ProgressNow, it takes the average college grad 20 years to pay off their loans after leaving school. Given the size of the market and outsized level of defaults, the free market interest rates would be much higher than the 6.8% currently charged (up from 3.4% in June).

Student debt has become a hot-button issue, but economic strategist John Canally of LPL Financial says the problem is overstated. The personal impact is huge but the systemic risk is minimal. "There's just not as much leverage of the leverage and derivatives tied to the student loan market that was tied to the housing market," he says. "From that perspective having a trillion dollars of student loan debt isn't the worst thing in the world."

There may be minimal systemic risk now but there's little question student debt is a problem for individuals impacted and the job market as a whole. Two-thirds of students leave school with debt. The average monthly payment is $500. According to the BLS the average salary for a teacher is $52,000 per year with starting wages much lower than that. Spending $6,000 a year might not be a problem for college grads able to get high paying jobs, but the prospect of putting more than 10% of your salary towards student loan debt is a harrowing for many.

The first ten years after college are what Canally refers to as "prime time for spending" on new houses, cars and other grown-up possessions. "From an economic perspective we can handle those payments. The question is 'can the economy grow fast enough to get those people back into the labor force after they've left college?'"

If there isn't enough economic demand to sop up the supply of debt-laden college grads it might not lead to a financial catastrophe but the implications for American society are grim.

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