Juggling Dynamite

According to the Education Data Initiative report, the total outstanding debt in US student loans (federal and private) is a record $1.77 trillion for more than 42 million borrowers.

The average debt of a federal student loan borrower is about $37,853, with those aged 50 to 61 having the highest average debt at $46,790.  Debt levels vary by degree: Bachelor’s degree holders owe $29,300, while graduate students average $66,000. Law school graduates face an average debt of $132,740, and medical school graduates average $296,500.

In 2020, President Trump temporarily paused federal student loan payments and interest accrual as a relief measure for student borrowers. The Biden administration extended the pause in payments multiple times through 2023, and a final grace period for loan repayments ended in October 2024. That meant tens of millions of Americans were to start making payments again.

Department of Education officials say less than 40% of all borrowers are current on their student loans.

Those who don’t make payments for nine months go into default, which is reported on their credit scores and can lead to collections. Currently, some 5.3 million borrowers are in default on their federal loans, and another 4 million are 91 to 180 days late on their payments.

Student loans are rarely discharged in bankruptcy, so outstanding balances weigh on borrowers’ spending and saving ability for years. This matters for individuals and the economy as a whole.  A lengthy extend-and-pretend period for student loans has come to a painful end.

Starting May 5, the US Department of Education will move roughly 1.8 million student borrowers into repayment plans and restart collections of loans in default. Borrowers who don’t make payments on time will see their credit scores go down, and in some cases, their wages will be automatically garnished.

Student loans have been a mess for a long time, and a clean-up is much needed. But schools are also part of the problem and must share in the payback period. The new US Minister of Education put it this way:

But I have another hard truth for the institutions that made empty promises to students while pocketing their loan dollars.

Colleges and universities call themselves nonprofits, but for years they have profited massively off the federal subsidy of loans, hiking tuition and piling up multibillion-dollar endowments while students graduate with six-figure debt. A widely cited 2015 study found that for every dollar of increased federal caps on subsidized loans, colleges raised tuition by 60 cents.

Many of the degree-granting programs that qualify for student loans are worthless on the job market, but colleges continue to accept students to these programs and encourage them to borrow to pay for them. Accountability is a two-way street. As we push to hold student borrowers to account, we will also push colleges to be responsible and transparent.

Unfortunately, many individuals and pensions hold high, inappropriate financial risk that pays rich fees to ‘advisors’ and product creators.Clients can be hard to help as they often prefer the ‘good news’ touted by sell-side wizards over sober, fiduciary assessments made from the perspective of capital protection and longer-term best interests. This is especially true when sober assessments suggest people need to save more/spend less. The discussion below is painful and accurate.

Ted Siedle is a former SEC attorney. His firm, Benchmark Financial Services, Inc. has pioneered over $1 trillion in forensic investigations of the money management industry. He’s nationally recognized as an authority on pensions and investment management matters, having testified before the Senate Banking Committee regarding fund scandals and is an expert in various Madoff-related and other litigations. In 2017, he secured the largest SEC whistleblower award in history of $48 million, and in 2018, the largest CFTC award in history at $30 million. Here is a direct video link.

Risk markets are staging another bear market bounce on Trump’s latest statement that he does not intend to fire Fed Chair Powell. They are also negotiating with China. These things pass as good news today, but the macro picture continues to deteriorate.

US capital expenditure plans and new orders (black lines below since 1985, courtesy of The Daily Shot) have contracted to levels that coincided with the recessions of 2020, 2008, 2001, and 1990 (grey bars). A recent Federal Reserve Board of San Francisco report notes spreading recession evidence, Assessing the Recent Rise in Unemployment:

“Recent transition rates and unemployment duration patterns are similar to historical patterns around the onset of several past recessions.”

“The increase in the unemployment rate since 2023 has mostly been associated with the decline in the job-finding rate, similar to pre-pandemic recessions. Consistent with this, we also find that the median duration of unemployment has increased notably.”

“The recent increase in the overall unemployment rate has been much more gradual than in pre-pandemic recession onsets. However, our findings suggest that unemployment flows—especially the job-finding rate—show a pattern qualitatively similar to past recession onsets and should be closely monitored for signs of rising recession risk.”

According to data compiled by Bloomberg Intelligence, analysts have cut their estimates for first-quarter S&P 500 earnings-per-share growth to 6.9% from 11.4% at the start of the year. See, US Profit Outlook Rarely this Sour.

While other developed countries have held up better than US markets year to date, international earnings revisions (green, yellow and light blue below since 2022) are now catching down to America (dark blue).  Nearly every global asset class has tumbled in April (dark blue below in local currency terms, light blue in USD terms). Equity losses have been significant, but still nowhere close to the average 34% decline that has unfolded in past US recessions.
So far, retail continues to buy (S&P 500 single stock buys since last May). At bear market bottoms, retail is liquidating with both hands and feet. There is no capitulation sign here yet, either.