Americans are busting out their credit cards again in a big way. According to the Federal Reserve Bank of New York’s Household Debt and Credit Report, consumers took on $241 billion in new debt in the fourth quarter of 2013, the largest quarterly increase since 2007.
People with low credit scores are racking up the most debt. Those with low credit scores are racking up the debt, however, in the student loan category. As you can see from the chart below, the largest percentage increase in any category represents people with low credit scores taking out student loans.
There’s nothing inherently problematic with less creditworthy individuals taking out student loans. If the debt is being put toward useful education that will help boost a borrower’s income down the road, the investment could be considered very wise. The problem is that it’s not entirely clear that the people who take out student debt are investing that money well.
Unlike most private loans, the main issuer of student loans — the federal government — issues such debt without taking into account the monetary value of the degree being sought. Whereas a small business must submit a business plan to a bank to receive financing, a student can get financing from the federal government without providing a plan for repayment. And these delinquency rates rates suggest that many students will be unable to pay, and because of bankruptcy laws, they will not have the option to discharge that debt in most circumstances.
At its core, the banking sector gives capital to consumers and businesses who can use that money in a productive way. But the federal student loan program doesn’t act like a bank. Instead, it directs funds based on need and desire. If so much of the rising personal debt burden is being driven by this kind of lending, it raises major concerns for the U.S. economy going forward.