Out of the Mortgage Frying Pan, Into the Student Loan Fire

Photographer: Daniel Acker/Bloomberg

John Stucker, a Purdue University student must pay back $80,000 he borrowed.

What’s going to be the bigger drag on the economy over the next years: the overhang of unpaid mortgages or the burden of student loans? At Bloomberg today, some unexpected answers.

First, the mortgage front. Yesterday Bloomberg’s Dan Levy reported on the upswing in property values in Las Vegas. The Market Now speculated that some of the shift has come from banks cutting down on foreclosures that dumped properties on the market at rock-bottom prices.

Today John Gittelsohn and Prashant Gopal take a deep dive into the national real estate market, finding that the foreclosure flood has ebbed nationwide. Banks, as one analyst puts it, have managed to “slow walk” the process, and “bleed through” the overhang of defaults over a long time. That’s limited the damage to the economy.

Compare that to what’s happening with student loans. Above, a chart from Bloomberg’s David Wilson shows that as mortgage delinquencies have fallen to near the 6 percent mark, student loan delinquencies have risen sharply. Eleven percent of student loans are now 90 days late or more; that number is now higher for student loans than for credit cards, reversing a pattern that has held for years.

Wilson points out that the delinquency number understate the share of borrowers who are drowning in debt because it doesn’t include the nearly half of student loans that aren’t due for repayment. For-profit schools, it’s worth noting, have been especially adept at making sure that students who can’t pay their bills get postponements that keep those numbers down. Eventually these borrowers, too, will default on their loans.

As the mortgage crisis diminishes, the student loan crisis builds. As one report that Wilson cites puts it, “student loan debt crowds out other consumption.” So the damage here hits the whole economy, not just overburdened students and grads. Unlike other debt, student loans don’t get erased in bankrupty; the unpaid debt lurks in the wings of the economy more or less forever. The Market Now is betting that eventually there will some sort of student loan bailout plan; it won’t happen, though, before there’s a lot more pain.

A version of this post appeared earlier in the Market Now newsletter. Click here to register at Bloomberg.com and subscribe to The Market Now daily email.

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