The total amount of student loans outstanding has grown from approximately $500 billion in 2006 to $1.3 trillion at the end of 2014. Of the $1.3 trillion in student loans outstanding, approximately $1.1 trillion are either direct loans from the U.S. Department of Education or outstanding loans from the now terminated Federal Family Education Loans Program (FFEL). The remaining $190 billion can be attributed to private loans.

There are several reasons that have contributed to the rise in the amount of student loans outstanding: overall college/advanced degree enrollment has increased over the past decade, cost of higher education has increased, graduates pre-recession have had a difficult time repaying their obligations, and as a result of the recession, students are relying on financial aid more heavily.

This week’s chart illustrates the portfolio of direct and FFEL loans by their loan status at the end of 2014. We focus on the categories described as Deferment, Forbearance, Default, and Other (see glossary below). These categories represent over 30% of the loan portfolio and are considered the highest risk categories because payments have been postponed, suspended, or ceased completely.

The pace of the economic recovery has been muted for a multitude of reasons; however, the overwhelming student debt load that has accumulated over the past decade has only exacerbated the problem. Studies have shown that people with student loans are less likely to start businesses of their own, which leads to less job creation and investment. Young Americans are delaying marriage and household formation which leads to a decrease in consumption. Additionally, holders of student debt are delaying the purchase of their first home.

It’s difficult to say if the recession and increase in student loans is a cause and effect relationship or vice versa, but most Americans can agree that some reform is necessary with regard to the cost of tuition or the cost of debt. If neither is addressed, we may continue to see the high risk categories discussed earlier increase as a percentage of debt outstanding, thus further depressing economic growth.

 

Glossary:
In-School – Includes loans that have never entered repayment as a result of the borrower’s enrollment in school.
Grace – Includes loans that have entered a six-month grace period after the borrower is no longer enrolled in school at least half-time. Borrowers are not expected to make payments during grace.
Repayment – Includes loans that are in an active repayment status.
Deferment – Includes loans in which payments have been postponed as a result of certain circumstances such as returning to school, military service, or economic hardship.
Forbearance – Includes loans in which payments have been temporarily suspended or reduced as a result of certain types of financial hardships.
Default – Includes loans that are more than 360 days delinquent.
Other – Includes loans that are in non-defaulted bankruptcy and in a disability status.

One of the most notable economic metrics that has not yet recovered from the recent recession is income and wage growth. This is not surprising: given the high level of unemployment, employers have been able to successfully hire without having to pay a material premium in wages. This trend has been supported by the level of wage growth, which has averaged close to 2%, significantly below its pre-recession average of 3.5%.

However, as the unemployment rate has abated, this trend appears to be reversing itself, at least in terms of future wages expectations on behalf of workers. Our chart this week shows the growing level of workers who expect their incomes to actually increase in the coming years (blue line in the graph). Predictably, the number of workers who expect their incomes to decrease is dropping (red line). Collectively, these patterns suggest a growing confidence that wages will increase, which should translate into more disposable income for consumers. Given that the U.S. economy is one driven by consumption, higher wages should translate into a notable tailwind for economic growth.

This week’s Chart of the Week examines how total employment has changed by sector since the beginning of the recession. Recently, nonfarm employment recovered the total net jobs lost during the recession, but as the chart shows not all industries have fared equally during the recovery. It comes as little surprise that construction and manufacturing have been among the hardest hit, dropping about 20% and 12% respectively, for a combined loss of 3.1 million jobs. Additionally it should be noted that this does not account for population growth, making these losses more significant.

When the overall landscape of the economy changes so dramatically multiple issues can arise. First and most importantly, workers who lost jobs in sectors hit hardest have not seen their jobs return. As a result they must change careers and find work in a different industry, or risk being unemployed for the long-term. However, even if they are willing to make this career change they might not have the skills necessary to find a job in another industry. Similarly, expanding sectors may have difficulty finding qualified workers for their newly created positions. Both of these issues are inefficiencies that cause a drag on economic growth.