The problems of student debt and loans are mounting

The UK university system is facing trouble on more than a few fronts. Some are struggling full stop as we note talk that they will not be bailed out. That comes on top of the issue of student loans and debt which makes me wonder how useful a degree is these days? Especially at a time of struggling real wages.  Although wages for some do not seem to be a problem. From UK Parliament in June of this year.

A table of vice-chancellors’ salaries in the Times Higher Education in June 2017 showed that Dame Glynis Breakwell, the vice-chancellor of the University of Bath was the highest paid university vice-chancellor in the UK; in 2016-17 she was paid a salary of £451,000. The table showed that vice-chancellors at six other universities also earned over £400,000 in that year.

Average pay was found to be £290,000 including pension contributions. You may recall that the University Superannuation Scheme became a hot topic for a while as there were strikes after suggestions that defined benefits needed to end. That was eventually resolved with higher contributions ( but not as high as originally suggested). Previously the total was 26% of salary split 18% employer and 8% employee.

The panel recommended that DB pensions could continue to be offered with contributions rising to 29 per cent — significantly lower than the 36.6 per cent from April 2020 proposed by USS, based on the valuation as it stands. ( Financial Times)

As an aside it was a shame that the Bank of England was not contacted as its research could be used to show that in fact such pensions have benefited from its policies. In spite of course of that fact that its Chief Economist Andy Haldane confessed to not understanding them. Oh well!

Moving on, payoffs to Vice-Chancellors had become an issue such as the £429,000 payoff at Bath Spa, £230,000 at the University of Sussex, and £186,876 at Birmingham City University. Coming back to pay the HM Parliament research showed that Vice-Chancellor pay had risen at an annual rate of 3.2% when other academic staff were restricted to 0.7%.

Student Debt

A glimpse of a potential future can be seen in the United States. Last night the US Federal Reserve updated us on total student debt at the end of the third quarter and it was US $1.563 trillion. One perspective is provided by the number below it for total motor loans which is a relatively mere £1.142.8 trillion. In terms of past comparisons the number for 2013 was £1.145.6 trillion for US student loans.

Noah Opinion on Bloomberg looked at it like this.

Many educated millennials would likely agree — since 2006, student debt has approximately doubled as a share of the economy……..The increase seems to have paused in the past two years, possibly due to the economic recovery (which allows students and their families to pay more tuition out of current income) and a modest  decline in college enrollment. But the burden is still very large, and interest rates on student-loan debt are fairly high.

His chart shows student debt being around 7.5% of US Gross Domestic Product and I can update his view because unless the US economy is growing at an annual rate of 5.6% then the burden is rising again.

Also the repayment issue is similar to that we have and indeed are experiencing in the UK.

Education researcher Erin Dunlop Velez crunched data that was recently released by the Department of Education, and found that only half of students who went to college in 1995-6 had paid off their loans within 20 years. Given the vast increase in the size of loans since then, repayment rates are likely to be even worse if nothing is done. Velez also found that default rates are considerably higher than had been thought.

There is another familiar feature.

What’s more, student lending has almost certainly contributed to the rise in college tuition, which has outpaced overall inflation by a lot. When the government lends students money, or encourages private lenders to do the same, it increases demand for college, pushing up the price.

In the  UK a lot of the inflation came in one go.

In the 2012/13 academic year, students beginning their studies could be charged up to a maximum fee of £9000 for first year courses compared with a maximum of £3375 in
2011/12 ( Office for National Statistics).

Whilst the weighting for university fees is low the substantial rise had an impact on the overall numbers.

In total, university tuition fees for UK and EU students added 0.31 percentage points to the change in CPI
inflation between September and October 2012. This was the largest component of the rise in the headline rate from 2.2 to 2.7%.

The CPI measure was particularly affected as it includes international and European Union students whereas the RPI only has UK ones meaning that the weight is around three times higher. That becomes quite an irony as we note the invariably higher ( ~ 1% per annum) RPI is used in the interest-rate on student loans. The road from being “not a national statistic” to being useful is short when it is something the public are paying or indeed Bank of England pensioners are receiving.

Comment

Let me start with some welcome good news. The Times Higher Education rankings show Oxford University at number one with Cambridge second and Imperial College ninth. My alma mater the LSE slide in at number 26. So we are getting something right as whilst it feels by hook or by crook our universities are highly regarded around the world. I think we do that a lot as we focus on issues ( the impact of the PPE degree course at Oxford on our political class) and maybe lose vision on the wider picture. Our institutions are often highly regarded around the world.

Also many more people are going to university as this from Gil Wyness at the LSE points out.

The UK has dramatically increased the supply of graduates over the last four decades. The proportion of workers with higher education has risen from only 4.7% in 1979 to 28.5% in 2011 (Machin, 2014). Rather than this enormous increase in supply reducing the value of a degree, the pay of graduates relative to non-graduates has risen over the same period: from 39% to 56% for men and from 52% to 59% for women).

However the issue of pay is a complex one as of course overall pay growth has slowed which if the workforce has become better qualified looks even worse. Also there is this which needs some revision I would suggest.

The expansion of universities helped raise growth and productivity (Besley and Van Reenen,
2013),

The financing side is much more shambolic though. The upside of the student loans era was supposed to make universities compete more, does anyone believe that now? Next comes the issue that a high interest-rate (6.3%) is used to raise the debt calculated like this by HM Parliament.

Currently more than £16 billion is loaned to around one million higher education students in England each year. The value of outstanding loans at the end of March 2018
reached £105 billion. The Government forecasts the value of outstanding loans to be reach around £450 billion (2017-18 prices) by the middle of this century.

No wonder the Bank of England dropped consumer loans from its credit figures! But more fundamentally debt is supposed to be repaid and yet we know most of this never will be. Yet along the way it will affect those who have it should they look to buy a house or have other borrowing.

The average debt among the first major cohort of post-2012 students to become liable for repayment was £32,000. The Government expects that 30% of current full-time undergraduates who take out loans will repay them in full.

The anthem for this comes from Twenty One Pilots.

Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out
Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out

 

 

 

 

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The more we are told UK household debt is not a problem the more worried we should be

We have reached a stage where the UK establishment is paying more and more attention to household debt issues. This reminds me of the explanation of the bureaucratic response to such issues explained by Yes Prime Minister. All we have to do is switch from foreign to economic policy. From imdb.com.

Sir Humphrey Appleby: Then we follow the four-stage strategy.

Bernard Woolley: What’s that?

Sir Richard Wharton: Standard Foreign Office response in a time of crisis.

Sir Richard Wharton: In stage one we say nothing is going to happen.

Sir Humphrey Appleby: Stage two, we say something may be about to happen, but we should do nothing about it.

Sir Richard Wharton: In stage three, we say that maybe we should do something about it, but there’s nothing we *can* do.

Sir Humphrey Appleby: Stage four, we say maybe there was something we could have done, but it’s too late now.

The other part of the strategy or game is to make it appear that you are on the case which these days in monetary or economic policy is summed up by the use of the word vigilant which seems set to become a metaphor for anything but in the way that Forward Guidance has become.

The Financial Conduct Authority

The Director of Supervision at the FCA Jonathan Davidson told us this yesterday,

The consumer credit sector is by far and away our largest sector in terms of number of firms with almost 40,000 firms registered with the FCA. And as a sector you have been growing – according to the Bank of England, consumer credit grew 9.3% over the last year.

Regular readers will of course be aware of this and we have looked at the issues below too.

After all, none of us can forget the context in which we are operating. Total credit lending to individuals is currently very close to its September 2008 peak. The circumstances are different now than 10 years ago, but there are still worrying numbers of householders who may still be in too deep. For example, 1 in 5 mortgages today are interest only mortgages, many of which were made at the height of the credit boom to borrowers with little equity in their homes and not a lot of disposable income. And they won’t mature until about 2032.

Indeed the circumstances are different as for example real wages are lower but I am not entirely sure that is what he means! The reminder about the scale of interest-only mortgages does make me think that an establishment solution for that would be to push house prices higher, oh hang on! If we look around we see that such a policy has worked in the south-east and other areas but would be struggling for example in Northern Ireland. As to affordability I guess Mr, Davdson would point us to this from the Office for National Statistics.

The median equivalised household disposable income in the UK was £27,300 in the financial year ending (FYE) 2017. After taking account of inflation and changes in household structures over time, the median disposable income has increased by £600 (or 2.3%) since FYE 2016 and is £1,600 higher than the pre-economic downturn level observed in FYE 2008.

Of course the aggregate numbers can hide trouble.

The Bank of England’s Financial Stability Report last year noted that consumer credit has grown rapidly and that, relative to incomes, household debt is high. And there are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads.

If we go back to the press conference back then Governor Carney told us this.

So there are pockets of risk, consumer credit is a pocket of risk, it’s been growing quite rapidly.

That made him sound a little like the “pocketses” of Gollum in the Lord of the Rings, Unfortunately this was not followed up as the press corps was only really interested in Brexit but here are the numbers from the report.

The total stock of UK household debt in 2017 Q2 was
£1.6 trillion, comprising mortgage debt (£1.3 trillion),
consumer credit (£0.2 trillion) and student loans (£0.1 trillion). It is equal to 134% of household incomes , high by historical standards but below its 2008 peak of 147%. Excluding student debt, the aggregate household debt to income ratio is 18 percentage points below its 2008 peak.

Fascinating isn’t it that they continue the campaign to exclude student debt from the numbers. Maybe it is because it is growing so fast or maybe like me they feel most of it will never be repaid. But in my view you cannot ignore it because it is having effects and implications right now. Also there is the false implication that just because the numbers are not quite as bad as 2008 we can sing along with Free.

All right now, baby, it’s a-all right now.
All right now, baby, it’s a-all right now

Interest-Only Mortgages

Oh and if these are an issue then  genuinely vigilant regulators might be on the case here.

However, since reaching a low-point in 2016, the interest-only market is starting to show signs of life again as lenders re-enter the market………However more recently, there are signs that lenders are starting to expand interest-only lending again, which rose to £5.4bn in Q3 2017, a 45% increase on the previous year. ( Bank Underground).

Everything is fine

Back in January research from the Bank of England via Bank Underground told us everything is fine.

Insight 1: Credit growth has not been driven by subprime borrowers

Insight 2: People without mortgages have mainly driven credit growth

Insight 3: Consumers remain indebted for longer than product-level data implies

I have to confess I am always somewhere between cautious and dubious about such detailed analysis I have seen it go wrong and more often than not spectacularly wrong so often. After all the “liar loans” pre credit crunch would have officially looked good. Also the authors seem keen to cover all the bases.

But vulnerabilities remain. Consumers remain indebted for longer than previously thought. And renters with squeezed finances may be an increasingly important (and vulnerable) driver of growth in consumer credit.

Motor Finance

Mr.Davidson offered some reassuring words on this subject.

The growth of PCP contracts in the motor finance market is a good example of an innovation that has had a significant impact………

So financing of car ownership has become more affordable, allowing more consumers to have more expensive cars. Indeed, the number of point-of-sale consumer motor finance agreements for new and used cars has nearly doubled from around 1.2m in 2008 to around 2.3m in 2017.

This type of innovation, and business model diversity, paints a really attractive picture of your industry.

Is it a miracle? Well please now re-read the quote using the definition of innovation from my financial lexicon for these times which was taught us by the Irish banks which is claimed triumph followed by disaster. I guess such thoughts will be reinforced by this bit.

It is important to me that we continue this innovation in the sector,

Also although he does not say it I am for some reason reminded of Royal Bank of Scotland by this.

A key observation and concern for us is that there are some business models for which customers who can’t afford to repay the principal are profitable, sometimes very profitable

Comment

There is much to consider here and let me give you a clear theme. Individual speeches are welcome and well done to Mr.Davidson but a succession of them means that the establishment is not  preparing us for moonlight and music and love and romance but rather

There may be trouble ahead……..

There may be teardrops to shed

Whilst they will be mulling this line.

Before the fiddlers have fled,

If we consider the overall position the reverse argument to mine is that collectively the debt is affordable and in theory and up in the clouds with the Ivory Towers it is. But when we return to earth reality is invariably far less convenient as this from Mr,Davidson’s speech suggests.

We are also seeing younger people borrowing a lot more relative to their incomes than my, baby boomer, generation. Why is this? It’s because of:More student borrowing. Our financial lives survey showed that 30% of 25-34 year olds have a Student Loan Company loan. The higher cost of getting onto the housing ladder. Shifting patterns of savings, borrowing and consumption. You don’t need to wait, you can have it now.

 

Among 25-34 year olds, 19% have no savings whatsoever, and a further 30% have less than a £1000 saved to use on a rainy day. Indeed, 36% had been overdrawn in the last 12 months.

At the same time, the number of self-employed people in the UK has risen by more than 1.5m since the turn of the century (a 45% increase), and more than 900 thousand people currently are on zero-hours contracts. The gig economy is growing strongly.

When bubbles blow up or pockets develop holes in them it is invariably something relatively small that is the trigger. The consequences however are usually widespread.

What is happening to US consumer credit and car loans?

If we take a look at the US economy then we see on the surface something which looks as it is going well. For example the state of play in terms of economic growth is solid according to the official data.

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the third quarter of 2017 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent.

Looking ahead the outlook is bright as well.

The New York Fed Staff Nowcast stands at 3.9% for 2017:Q4 and 3.1% for 2018:Q1.

That would be a change as the turn of the year has tended to under perform in recent times. Also if we use the income measure for GDP the performance is lower. But if we continue with the data we see that both the unemployment rate ( 4.1% in December) and the underemployment rate ( 8.1% in December) have fallen considerably albeit that the latter nudged higher in December.

Less positive is the rate of wage growth where ( private-sector non farm) hourly earnings are currently growing at 2.5%. This is no doubt related to this issue.

In the 2007-2016 period, annual labor productivity decelerated to 1.2 percent at an annual average rate, as compared to the 2.7 rate in the 2000-2007 period.

So a familiar pattern we have observed in many places although the US is better off than more than a few as it has real wage growth albeit not a lot especially considering the unemployment rate and at least has some productivity growth.

Interest-rates are rising

Whilst wages have not risen much in response to a better economic situation interest-rates are beginning to. The official Federal Reserve rate is now 1.25% to 1.5% and is set to rise further this year. If we move to how such things impact on people then the 30 year (fixed) mortgage rate is now 4.06%. It has had a complicated picture not made any easier by the current government shutdown but in broad terms the downtrend which took it as low as 3.34% is over.

How much debt is there?

As of the end of the third quarter of 2017 the total mortgage debt was 14.75 trillion dollars. This is not a peak which was 14.8 trillion in the spring/summer of 2008 but if we project the recent growth rate we will be above that now. Of course the economy is now much larger than it was then.

If we move to consumer credit then we see the following. It was 3.81 trillion dollars at the end of November and that was up 376 billion dollars on a year before.

In November, consumer credit increased at a seasonally adjusted annual rate of 8-3/4 percent. Revolving credit increased at an annual rate of 13-1/4 percent, while nonrevolving credit increased at an annual rate of 7-1/4 percent.

So quite a surge but care is needed as the numbers are erratic and October gave a much weaker reading. So we wait for the December data. If we look into the detail we see that student loans were 1.48 trillion dollars as of September and the troubled car loans sector was 1.1 trillion dollars. For perspective the former were were 1.05 trillion in 2012 and the latter 809 billion.

In terms of interest-rates new car loans are 5.4% from finance companies and 4.8% from the banks for around a 5 year term. Credit cars debt is a bit over 13% and personal loans are 10.6%.

Credit cards

The Financial Times is reporting possible signs of trouble.

The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion……Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.

It suggests that the rise in lending that has been seen is on its way to causing Taylor Swift to sing “trouble,trouble,trouble”

Yet borrower delinquencies are outpacing rising balances. While still less than half crisis-era levels, the consultancy forecasts soured credit card loans will reach almost 4.5 per cent of receivables this year, up from 2.92 per cent in 2015.

The St.Louis Federal Reserve or FRED is much more sanguine as it has the delinquency rate at 2.53% at the end of the third quarter of 2017. So up on the 2.29% of a year before but a fair way short of what the FT is reporting.

Maybe though there have been some ch-ch-changes.

“The driving factor behind the losses is that banks are putting weaker credits on the books,” said Brian Riley, a former credit card executive and now a director at Mercator.

Car Loans

According to CNBC lenders are being more conservative in the automobile arena.

The percentage of subprime auto loans saw a big decline in the third quarter despite growing concerns that auto dealers and banks are writing too many loans to borrowers with checkered credit histories, according to new data.

In fact, Experian says the percentage of loans written for those with subprime and deep subprime credit ratings fell to its lowest point since 2012.

In terms of things going wrong then we did not learn much more.

In the third quarter, there was a slight decrease in the percentage of loans 30 days overdue and slight increase in those that were 60 days delinquent.

Although a development like this is rarely a good sign.

Meanwhile, Experian says the average term for a new vehicle auto loan hit an all-time high of 69 months, thanks in part to a slight increase in the percentage of loans schedule to be repaid over 85 to 94 months.

“We’re starting to see some spillover to loans longer than 85 months,” said Zabritski.

This morning’s Automotive News puts it like this.

Smoke expects higher interest rates and tighter credit this year will drive many consumers to buy a used vehicle instead of a new one. Most of those buying used cars will be millennials, who are often saddled with student loans and remain credit challenged, he said.

It is no fun being a millennial is it? Although I suppose much better than being one in the last century as we have so far avoided a world war.

This piece of detail provides some food or thought.

Last year, the U.S. Federal Reserve raised interest rates three times for a total of 75 basis points, and data show that auto-loan lenders have been tightening credit for six straight quarters, but auto loans for “superprime borrowers” increased by just 20 basis points, Smoke said.

Are lenders afraid of raising sub-prime borrowing rates? Not according to The Associated Press.

Subprime buyers got substantially better rates even a year ago. The average subprime rate of 5.91% last year has jumped to 16.84% today, Smoke says. For a 60-month loan of $20,000, that means a monthly payment hike of more than $100, to $495.

Comment

There is a fair bit to consider here as we mull how normal this is for the mature phase of an economic expansion? Also how abnormal these times have been in terms of whether the benefits of the economic growth have filtered down much to Joe Sixpack? After all wage growth could/should be much better and the unemployment figures obscure the much lower labour participation rate. We will be finding out should interest-rates continue their climb as we mull the significance of this.

Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007, according to data from S&P Global Ratings. ( Financial Times).

One thing we can be sure of is that we will be told that everything is indeed fine until it can no longer possibly be denied at which point it will be nobody’s ( in authority) fault.

Jimmy Armfield

Not only a giant in the world of football in England but in my opinion the best radio summariser by a country mile. RIP Jimmy and thank you.

 

 

 

The UK Student Loan problem is going from bad to worse

Sometimes developments flow naturally together and we see a clear example of this today. It was only yesterday that I pointed out that the Bank of England puts its telescope to its blind eye on the subject of student loans.

 In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?

Excluding student debt, the aggregate household debt to income ratio is 18 percentage points below its 2008
peak.

This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees.

Losses mount

I am often critical of the Financial Times but this time Thomas Hale deserves praise for this investigation.

The UK government is set to book a loss of almost £1bn from its largest privatisation of student loans, raising questions over the valuation of tens of billions of pounds of remaining graduate debt.

The most obvious question is why are we privatising these loans at a loss? It was of course the banking sector which saw privatisation of profits and socialisation of losses as fears will no doubt rise that this could be the other way around in terms of timing.

As we look at the detail the news gets even more troubling.

The controversial sale of a batch of student loans this week is expected to raise around £1.7bn, according to a Financial Times analysis of deal documentation. The loans, which had a face value of £3.7bn last year, are part of a total of £43bn in loans made to students up to 2012, which are currently on government books valued at just under £30bn, according to the Department of Education’s latest published accounts, as of the end of March this year.

As you can see not only are those loans not alone but they are being sold at a level below previous mark downs in value. The £3.7 billion face value had already been marked down to £2.5 billion and now we see this.

The deal will raise around £1.7bn in cash through the securitisation process, where assets are packaged together and sold off as bonds to investors. The process is a common feature of financing for student borrowing in the US but has rarely been used in the UK.

This seems odd as why would the UK taxpayer want to capitalise his/her losses?

The government’s loan book sale is dependent on passing a “value for money” test, which is designed to ensure that public assets are not sold too cheaply. The details of the test will not be made public but it is expected to provide a different, lower valuation for the loans compared to those on the DfE accounts.

The sale of the loans is part of a wider government effort to sell public assets “in a way that secures good value for money for taxpayers”, according to a statement on the student loans company website. The government aims to raise a total of £12bn through selling an unspecified amount of pre-2012 student loans over the next five years.

This brings us to a combination of Yes Prime Minister and George Orwell. Whilst it is possible that selling something at half its original value is sensible it needs to be checked carefully especially if it is public money . Also if it is a good deal for the new investors why not keep it?

What has happened to these loans?

Essentially these are loans from the previous decade which only have a rump left and guess which rump?

The transaction is made up of loans issued between 2002 and 2006, on which repayments are linked to income. Around half of students who borrowed during that period had already paid off their loans by the end of the 2015-16 financial year, meaning the pool of debt included in the deal is likely to be of a lower credit quality. Of those graduates with outstanding loans, only 60 per cent made a repayment in the same financial year.

So 40% of the remaining loans are seeing no repayments at present and the pricing here suggests that this will continue. One fear is that the buyers of the loans may try to pressurise students to repay even if they cannot afford to. Also there is the issue of what looks like around 20% of the students from over a decade ago still do not earn more than the £17,775 threshold ( confusingly more recent students seem to have a £21,000 threshold).

The rationale

Carly Simon poses the apposite question

Why?…. Don’t know why?

This is what it is all about. Yet again a wheeze for the national debt numbers.

Part of the motive for the sale is to reduce public debt. The cash generated from the transaction will go towards reducing public sector net debt, which was £1.79tn at the end of October. Unlike cash, student loan assets do not count towards the calculation of public sector net debt.

Comment

This is in my opinion a disaster on a national scale. Let me open with an issue which regular readers will be aware of but newer ones may not. This is the cost or interest on these loans and you may like to note that the most the UK would pay on issuing government debt is ~1.5%. From MoneySavingExpert (MSE ).

The rate used is the previous March’s RPI inflation rate. March 2017’s RPI inflation rate was 3.1% meaning interest charged on student loans for the 2017/18 academic year is between 3.1% and 6.1% depending on whether you’re studying or graduated, and how much you earn.

So at least double and maybe quadruple the alternative which speaks for itself. On this subject I both agree and disagree with MSE. He thinks for some it does not matter than much of this will never be repaid and is in that sense “free.” But you see along the way it matters as there is not only the psychological effect of say a £50k debt but it is also it affects mortgage calculations now. Recently reports have arisen of younger people not joining the NHS pension scheme and I wonder if that is linked to the fact that nurses now have student debts and feel burdened.

Back on the first of August 2016 I explained the problem like this.

We move onto the next problem which is that ever more of this debt will never be repaid which poses the question of what is the point of it? It feels ever more like a rentier society where someone collects all the interest and the takes the loan capital but we then forget that. Another type of borrowing from the future.

It would be much simpler I think to abandon the whole system and go back to providing tuition fees and grants. Also as this reply to the FT from safeside implies perhaps some of the weaker universities should be trimmed.

It would be interesting to see which universities produce graduates who are sub inv grade

It is tempting to suggest we should also write the whole lot off as let’s face it we are writing most of it off along the way anyway. The only major issue I think is how to treat fairly those who have already repaid their loans either in part or in full. It would also end the shambolic way the loans are collected. We seem to have replaced a system which worked with one based on more than few fantasies and if we continue to follow the American way then as I pointed out in August 2016 students can presumable expect this.

It’s 9 p.m. and your phone chimes. You’re among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you’ve started to fall behind on your payments.

You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.

 

The Bank of England has a credit problem

There is a lot to consider already today as I note that my subject of Monday Bitcoin is in the news as it has passed US $10,000 overnight. The Bank of England must be relieved that something at least is rising faster than unsecured credit in the UK! Sir John Cunliffe has already been on the case.

. Sir JohnCunliffe says cryptocurrencies not a threat to financial stability – but says it is not an official currency and urges investors to be cautious  ( h/t Dominic O’Connell )

It is probably a bit late for caution for many Bitcoin investors to say the least. However if we return to home territory we see an area where the Bank of England itself was not cautious. This was when it opened the UK monetary taps in August 2016 with its Bank Rate cut to 0.25%, £60 billion of extra Quantitative Easing and the £91.4 billion and rising of the Term Funding Scheme. This has continued the house price boom and inflated consumer credit such that the annual rate of growth has run at about 10% per annum since then.

The credit problem

As well as the banking stress tests yesterday the Financial Stability Report was published and it spread a message of calm and not a little complacency.

The overall stock of outstanding private non-financial sector debt in the real economy has fallen since prior to the crisis,though it remains high by historical standards, at 150% of GDP.

There are two immediate problems here. The credit crunch was driven by debt problems so using it as a benchmark is plainly flawed. Secondly many of those making this assessment are responsible for pushing UK credit growth higher with their monetary policy decisions so there is a clear moral hazard. In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?

Excluding student debt, the aggregate household
debt to income ratio is 18 percentage points below its 2008
peak.

This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees. From HM Parliament in June.

Currently more than £13 billion is loaned to students each year. This is expected to grow rapidly over the next few years and the Government expects the value of outstanding loans to reach over £100 billion (2014 15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014 15 prices) by the middle of this century.

Pretty much anything would be under control if you exclude things which are rising fast! On that logic thinks are okay especially if use inflation to help you out.

Credit growth is, in aggregate, only a little above nominal GDP growth. In the year to 2017 Q2, outstanding borrowing by households and non-financial businesses increased by 5.1%; in that same period, nominal GDP increased by 3.7%.

They have used inflation ( currently of course above target ) to make the numbers seem nearer than they are. This used to be the common way for looking at such matters but that was a world where wage growth was invariably positive not as it is now. If we switch to real GDP growth which was 1.7% back then or wages growth which this year has been mostly a bit over 2% in nominal terms things do not look so rosy.

If we apply the logic applied by the Bank of England above then this below is a sign of what Elvis Presley called “we’re caught in a trap”

The cost of servicing debt for households and businesses is
currently low. The aggregate household
debt-servicing ratio — defined as interest payments plus regular mortgage principal repayments as a share of household disposable income — is 7.7%, below its average since 1987 of 9%.

So not much below but something is a lot below. There are many ways of comparing interest-rates between 1987 and now but the ten-year Gilt yield was just under 10% as opposed to the 1.25% of now. So we cannot afford much higher yields or interest-rates can we?

Consumer credit

The position here is so bad that the Bank of England feels the need to cover itself.

consumer credit has been growing rapidly,
creating a pocket of risk

Still pockets are usually quite small aren’t they? Although the pocket is expanding quite quickly.

The outstanding stock of consumer
credit increased by 9.9% in the year to September 2017

What are the numbers for economic growth and wages growth again? There is quite a gap here but apparently in modern language this is no biggie.

Rapid growth of consumer credit is not, in itself, a material risk to economic growth through its effect on household spending. The flow of new consumer borrowing is equivalent to only 1.4% of consumer spending, and has made almost no contribution to the growth in aggregate consumer spending in the past year.

This is odd on so many levels. For a start on the face of it there is quite a critique here of the “muscular” monetary policy easing of Andy Haldane. Also if the impact was so small the extra 250,000 jobs claimed by Governor Carney seems incredibly inflated. In this parallel world there seems almost no point to it.

Yet if we move into the real world and look at the boom in car finance which supported the car market there must have been quite a strong effect. Of course that has shown signs of waning. Also if you look at what has been going on in the car loans market and the apparent rise of the equivalent of what were called “liar loans” for the mortgage market pre credit crunch then the complacency meter goes almost off the scale with this.

Low arrears rates may
reflect underlying improvement in credit quality

Number crunching

I know many of you like the data set so here it is and please note the in and then out nature of student debt.

The total stock of UK household debt in 2017 Q2 was
£1.6 trillion, comprising mortgage debt (£1.3 trillion),
consumer credit (£0.2 trillion) and student loans (£0.1 trillion).
It is equal to 134% of household incomes (Chart A.9), high by historical standards but below its 2008 peak of 147%.(1)
Excluding student debt, the aggregate household debt to
income ratio is 18 percentage points below its 2008 peak

Most things look contained if you compare them to their peak! Also if we switch to mortgages we get quite a few pages on how macroprudential regulation has been applied then we get told this.

The proportion of households with high mortgage
DTI multiples has increased somewhat recently, although it
remains below peaks observed over the past decade ( DTI = Debt To Income)

Comment

The issue here can be summarised by looking at two things. This is the official view expressed only yesterday.

Lenders responding to the Credit Conditions Survey reported that the availability of unsecured credit fell in both 2017 Q2 and Q3, and they expect a further reduction in Q4.

Here is this morning’s data.

The annual growth rate of consumer credit was broadly unchanged at 9.6% in October

As you can see the availability of credit has been so restricted the annual rate of growth remains near to 10%. The three monthly growth rate accelerated to an annualised 9.6% and the total is now £205.3 billion.

The situation becomes even more like some form of Orwellian scenario when we recall the credit easing ( Funding for Lending Scheme) was supposed to boost lending to smaller businesses. So how is that going?

in October, whilst loans to small and
medium-sized enterprises were -£0.4 billion

There is of course always another perspective and Reuters offer it.

Growth in lending to British consumers cooled again in October to an 18-month low, according to data that may ease concerns among Bank of England officials concerned about the buildup of household debt………The growth rate in unsecured consumer lending slowed to 9.6 percent in the year to October from September’s 9.8 percent, the slowest increase since April 2016.

 

 

 

It is time to put Student Loans back in the UK debt numbers

This morning has seen some updated statistics for the amount of debt in the UK released by The Money Charity. In it was something to grab the headlines as this from the BBC shows.

Household debts have spiralled to a whopping £1.5tn in the UK for the first time, new statistics show.

If we go to The Money Charity itself we are told this and apologies for their enthusiasm for capitals.

PEOPLE IN THE UK OWED £1.503 TRILLION AT THE END OF SEPTEMBER 2016. THIS IS UP FROM £1.451 TRILLION AT THE END OF SEPTEMBER 2015 – AN EXTRA £1036.58 PER UK ADULT.

So we cross a threshold and indeed are given a troubling view of the future.

ACCORDING TO THE OFFICE FOR BUDGET RESPONSIBILITY’S JULY 2015 FORECAST, HOUSEHOLD DEBT IS PREDICTED TO REACH£2.551 TRILLION IN Q1 2021.

So debt has risen and is forecast to continue doing so at what must be a faster rate than we have seen. I will look at the position in a moment but we cannot move on without pointing out that the OBR ( Office of Budget Responsibility) forecasts lots of things but even so does not get many right!

Bringing this to a household and individual level

The Money Charity presents us figures for debt per UK household.

THE AVERAGE TOTAL DEBT PER HOUSEHOLD – INCLUDING MORTGAGES – WAS £55,683 IN SEPTEMBER. THE REVISED FIGURE FOR AUGUST WAS £55,523.

And also per person.

PER ADULT IN THE UK THAT’S AN AVERAGE DEBT OF £29,770 IN SEPTEMBER – AROUND 113.7% OF AVERAGE EARNINGS. THIS IS SLIGHTLY UP FROM A REVISED £29,685 A MONTH EARLIER.

It is interesting to see the numbers compared to average earnings but care is needed. A better comparison would be with net or post-tax earnings and even with that there is the issue that as a minimum one has to eat to survive and pay other essential bills.

What does this cost in terms of interest?

Lets take a look at what we are told.

BASED ON SEPTEMBER 2016 TRENDS, THE UK’S TOTAL INTEREST REPAYMENTS ON PERSONAL DEBT OVER A 12 MONTH PERIOD WOULD HAVE BEEN£51.135 BILLION.

If we look at this overall we see that such a number comes from us living in an era of relatively low interest-rates although the 3.4% to 3.5% is nothing like the near zero interest-rate policy that has been applied to UK government debt.  I will break the numbers down in a moment but for now here are some daily and per household numbers.

  • THAT’S AN AVERAGE OF £140 MILLION PER DAY.
  • THIS MEANS THAT HOUSEHOLDS IN THE UK WOULD HAVE PAID AN AVERAGE OF £1,894 IN ANNUAL INTEREST REPAYMENTS. PER PERSON THAT’S £1,013 3.87% OF AVERAGE EARNINGS.

What are the interest-rates paid?

We discover that the vast amount of the debt must be secured or mortgage debt otherwise the interest-rate would not be possible. From the Bank of England.

The effective rate on the stock of outstanding secured loans (mortgages) decreased by 10bps to 2.74% in September and the new secured loans rate fell to 2.27%, a decrease of 4bps on the month. The rate on outstanding other loans decreased by 2bps to 6.76% in September and the new other loans rate decreased by 37bps to 6.65%

The fact that the numbers are decreasing will lower the monthly burden per unit of debt and no doubt would have the Bank of England slapping itself on the back.  However its effective interest-rates series somehow misses what is happening in the world of credit cards and overdrafts so let me help out from its underlying database.

The credit card interest-rate it calculates was 17.94% in October. This is a lot more awkward as you see it was around 15% as we hit the peak of the last boom in the summer of 2007. If we move to the overdraft interest-rate it calculates it was 19.7% October and if we make the same comparison with the summer of 2007 it was around 17.7% or 2% lower back then. Perhaps the soon to be closed staff accounts at the Bank of England have had quite different interest-rates and it occurred to no-one that the wider population was seeing higher as opposed to the officially claimed lower interest-rates. Of course there is an issue of bad debts here but interest-rates of 17.94% and 19.7% when Bank Rate is 0.25% seem to raise the spectre of that of fashioned word usury.

Where is the debt?

Most of it is mortgage debt but as I pointed out last Monday unsecured debt is growing quickly.

OUTSTANDING CONSUMER CREDIT LENDING WAS £188.7 BILLIONAT THE END OF SEPTEMBER 2016.

  • THIS IS UP FROM £176.3 BILLION AT THE END OF SEPTEMBER 2015, AND IS AN INCREASE OF £247.10 FOR EVERY ADULT IN THE UK.

This means that the situation is currently as shown below.

Consumer credit increased by £1.4 billion in September, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.6% and 10.3% respectively.

This means the following on a household level.

PER HOUSEHOLD, THAT’S AN AVERAGE CONSUMER CREDIT DEBT OF £6,991 IN SEPTEMBER, UP FROM A REVISED £6,963 IN AUGUST – AND  £462.19 EXTRA PER HOUSEHOLD OVER THE YEAR.

Also just under a third of this is one of the most expensive forms which is credit card debt.

Time for some perspective

Let us take Kylie’s advice and step back in time for some perspective. I have chosen to go back to September 2007 as it was then as Northern Rock went cap in hand to the Bank of England that warning lights of “trouble,trouble,trouble” were flashing.

Total UK personal debt at the end of September 2007 stood at £1,380bn. The growth rate increased to 10.0% for the previous 12 months which equates to an increase of £120bn. Total secured lending on homes at the end of September 2007 stood at £1,163bn. This has increased 10.9% in the last 12 months. Total consumer credit lending to individuals in September 2007 was £217bn. This has increased 5.8% in the last 12 months.

Back then they were much less keen on using capitals! Also I note that unsecured debt was growing much more slowly then.although it was in total more than now.

Now the theme that we cut our lending in this area has a problem. Let mt take you to a 2012 paper on the subject from the Bank of England.

The stock of student loans has doubled over the five years to 5 April 2012 to £47 billion, and now represents more than 20% of the stock of overall consumer credit. With student loans unlikely to be affected by the same factors that influence the other components of consumer credit, the Bank is proposing a new measure of consumer credit that excludes student loans

Consumer credit fell from £207 billion in June 2012 to £156 billion in August. Problem solved at a stroke…oh hang on!

So yes we cut consumer credit but not as much as the unwary might think.

Student Loans

Sadly we do not have a UK series but here are the numbers for England as they are much the largest component.

The balance outstanding (including loans not yet due for repayment) at the end of the financial year 2015-16 was £76.3 billion, an increase of 18% when compared with 2014-15.

The total is growing fairly quickly as indeed we would have expected.

The amount lent in financial year 2015-16 was £11.8 billion, an increase of 11% when compared with 2014-15.

Thus if they went back into the consumer credit numbers we would see a rather different picture.

Comment

So on today’s journey we have reminded ourselves that the comforting official view on UK household and in particular unsecured credit has been strongly influenced by the removal of student loans from it in the summer of 2012. Otherwise today’s headline would be household debts are now circa £1.6 trillion. A bit like the situation with the official consumer inflation measure where the fastest growing sector of owner occupied housing costs somehow got omitted. The UK establishment has been meaning to put it back for over a decade now!

Meanwhile what to measure this against poses its own problems. Some would argue that a higher value for the housing stock via higher house prices makes the mortgage lending even more secure. The catch of course is that the house prices depend on the lending which the Bank of England fired up with its Funding for Lending Scheme in the summer of 2013. If we move to real incomes then in spite of recent growth it is hard to be reassured as according to the official figures we are still 4% below the summer of 2007.

Meanwhile something troubling for the Bank of England nirvana of higher mortgage debt and house prices emerged over the weekend.

A large house price depreciation can be good for economic growth, research finds ( World Economic Forum)

The problem that is student debt in the UK and US

One of the features of the modern era is the rise and rise of student debt. Regular readers will be aware of my view that it is one of the contradictions of the modern era that whilst we are told we are much better off we are apparently unable to fund university education in the way that we used too. For example for the benefit of younger readers when I went to the London School of Economics my fees were paid (by my local authority) and I got a grant for living-expenses although I was in the period where they were cut heavily. If I recall correctly I got in my final year the same amount as I received in my first term.

There has been some new research on the state of play so let us take a look firstly at the position in the United States.

White House Council of Economic Advisers

This published a report on the subject so let us start with some facts.

As of 2015, outstanding student debt had grown to $1.3 trillion, due in large part to rising enrollments and a larger share of students borrowing. While the average loan size has also increased, the average undergraduate borrower owes $17,900 in debt.

What is the individual experience?

Increases in per-borrower debt have also contributed to the expanding student loan portfolio, with average outstanding balances adjusted for inflation increasing by roughly 25 to 30 percent between fiscal years 2009 and 2015 alone.

The total number of those holding student debt has also risen.

In 2004, roughly 23 million individuals held student debt (FRBNY), and this number grew to over 40 million individuals in 2015.

The WHCEA is very bullish on the consequences of this.

Typically, that investment pays off, with bachelor’s degree recipients earning $1 million more in their lifetime and associate’s degree recipients earning $360,000 more, compared to high school graduates.

In fact according to it everyones a winner.

Society also benefits from these investments through such mechanisms as higher tax revenues, improvements in health, higher rates of volunteering and voting, and lower levels of criminal behavior.

The report has a fair bit of cheerleading in it but cannot avoid the fact that some do not do so well.

In particular, evidence suggests that the relatively low returns at for-profit colleges are increasingly becoming a cause for concern, especially given the high rates of borrowing by students at those schools.

More people went to university in the period 2010/11 in response to what is called the Great Recession and outcomes for them look less rosy than what is presented here.

The impact of the debt

The Demos think tank did some work on the implications of student debt by comparing households with a degree both with and without it.

It finds that, over a lifetime of employment and saving, $53,000 in education debt leads to a wealth loss of nearly $208,000.

We can generalize this result to predict that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households, not even accounting for the heavy impact of defaults.

Some care is needed as some of the wealth loss is via the fact that those in debt are assumed to make lower pension payments. But even the White House Advisory Council was unable to avoid pointing out that the share of income spent on student debt has risen from 3% to 9%.

What does the debt cost?

According to the US Federal Student program there are fixed interest-rates of 3.76% for undergraduates and either 5.31% or 6.31% for post-graduates. There are also fees of the order of 1% for the former and 4% for the latter.

Problems

It seems that for poorer income groups there is more of a problem for several reasons. They tend to go to not so good colleges and more drop out from higher education. Should you fall behind then this is what happens according to Bloomberg.

It’s 9 p.m. and your phone chimes. You’re among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you’ve started to fall behind on your payments.

You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.

The UK experience

For those unaware of the UK situation the Tony Blair and John Major governments set out to increase the number of students in higher education substantially. The Intergenerational Foundation sums the changes up thus.

This middle cohort now forms the post-1992 group of rebranded colleges that mushroomed in the 1990s and has led to the current situation where almost 50% of young people go on to university higher education. This amounts to a near quadrupling of the number of graduates of 3+-year courses with more careers, such as police or nursing, now requiring a degree.

It compares with the 1980s when the number of people going onto university higher education was more like 13%.

Doubts about the benefits

Back in the days when many fewer people went onto higher education it seemed clear that there were gains from it. From the Intergenerational Foundation.

On Friday 15 November 2002 the then higher education minister Margaret Hodge………. claimed that graduates earned £400,000 more than non-graduates over a lifetime, but their education is subsidised by 35% (twice as much as in the US).

If we move onto 2011 you will not be surprised to learn that becoming a doctor or dentist led to large “graduate premiums”

70.1% for men and 91.7% for women.

However the expansion of tertiary education was a lot less positive for many.

But many degree subjects regularly yield little or no premium at all, such as creative arts, design, sports science, and hospitality.

The overall situation is summarised thus.

Today, the average figures quoted for the graduate premium have fallen even further to around the £100,000 mark. Note that £100,000 spread over a 45 year career is worth only £2,222 per year, before taxes and National Insurance which is not high enough to cover even the interest that will accrue on the average loan – hardly a sound financial justification for taking on the debt.

On the other side of the ledger fees have risen as potential gains have fallen. Back in 1998 UK undergraduate tuition fees were introduced at a level of £1000 per annum whereas now in England they are increasingly £9000 per annum.

There is no one single interest-rate but much of the payments will now ( as of 2012) be at the Retail Price index plus 3%.

Comment

There is much to consider here and the opening salvo comes from the establishment which tells us not only that a university education is good but that it is so good that an ever rising debt burden does not matter. There are an increasing number of questions about the statement as we note that areas where it is true ( doctors & dentists) are being added to by areas where it is not true. If we stay within the arena of medicine what will happen to nurses troubles me. From Which.

Update July 2016: The government have confirmed plans to replace bursaries with loans for all nursing and midwifery students beginning their studies in September 2017.

So ever more debt but for what gain? How can nurses ever repay this? Also if it is so good why does the Bank of England omit it from the monthly money and credit report?

We move onto the next problem which is that ever more of this debt will never be repaid which poses the question of what is the point of it? It feels ever more like a rentier society where someone collects all the interest and the takes the loan capital but we then forget that. Another type of borrowing from the future.

We need to have a good think about what jobs actually require a university type education and which do not. Perhaps we could have more vocational types of higher education and maybe we might like to call them colleges and polytechnics.

Meanwhile I note that the UK establishment which spends so much time trying to discredit the “not a national statistic” RPI measure of inflation finds that like Lazarus it can leap from its claimed grave when required to inflate and raise revenues.

And it’s very far away
But it’s growing day by day
And it’s all right, baby, it’s all right

They can tell you what to do
But they’ll make a fool of you
And it’s all right, baby, it’s all right

We’re on a road to nowhere