How to Save an Economy One Default at a Time

I didn’t pay much attention to the Australian budget a couple of weeks ago.

We had our Doomers’ Ball on that night. I was speaking at the event, so I was a little more focused on not stuffing up in front of everyone at the Windsor Hotel.

As an investment analyst, you would think I’d be dying to comb through the budget the next day.

Nup. No interest.

I’ve caught tidbits here and there. Frankly, the budget is just another fairy tale the government feeds us. A cut here, a tweak and some spending over there. At 36, I shouldn’t be this jaded about politics. I’m just not old enough to reach a granddad level of contempt. Yet each year, I read the same stuff over and over. Nothing really changes.

One of the tidbits I have heard in recent weeks is the government’s desire to lower the income threshold for Australians to start repaying their higher education debts. Depending on your age, you may call it HECS. The younger people of today call it FEE-HELP.

As it stands today, once a person starts earning $56,000 per year, they are required to start paying back their FEE-HELP debt. However, this year’s budget wants to lower the threshold to $42,000.

Apparently, lowering the income threshold will stop ‘bad debts’ and force an extra 183,000 people to start repaying back their education costs. As it stands, the government says 23% of people aren’t expected to pay back their debt. Lowering the threshold will mean the ‘bad debts’ reduces to 17%.

And by bad debt, they mean people who don’t earn over $42,000 per year. Australia’s education repayment system is tied to your tax return. So if you employer doesn’t pay it back (by deducting it from your wages throughout the year), the Australian Tax Office will kindly deduct what you owe for the year from your tax return.

If this gets past the Senate, this will apply to all loans as of 2018-2019. Not just FEE-HELP loans issued that year. It will include all of the $50 billion in outstanding uni fees.

The timing of Australia’s move puts it on a polar-opposite path to the US.

Right now, there is a bill going through US congress that may save the US economy.

The bill is called the H.R.2366. That’s not very media-friendly. A more memorable name for it is ‘Discharge Student Loans in Bankruptcy Act of 2017’.


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This bill could be the ticket to saving the US economy in the future.

At present, if an American files for bankruptcy, they still must pay back their student loans. In other words, the student debt doesn’t get wiped.

It’s the same in Australia. If you file for bankruptcy here, your FEE-HELP debt remains. That debt is still waiting for you to pay back, no matter what.

But unlike Australia, which will reduce the minimum wage level to start paying it back, the US is arguably about to let people wipe their student loan debts.

Australia and America have two things in common when it comes to education. One is that the majority of the student debt is government-owned debt. And higher debt accumulation by students has been largely driven by government initiatives forcing the price of tertiary education up.

Given the government owns the debt, you have to wonder if it has thought this through. Because a system like this would be ripe for abuse. If you have no assets and minimal income, why would you struggle to pay back your student loans?

You may damage your credit rating in the short run. But in the long run, you’ll be student debt free.

But hey, we live in a society that only operates on credit. Given some time, it wouldn’t be long before creditors found a way to lend people money again.

In Australia, the large FEE-HELP loans aren’t treated as counterproductive to our economy. There isn’t any obvious data coming through suggesting that people repaying FEE-HELP debts are a drag on the economy.

Our student loan debts are half of that of American ones though.

The average Aussie pays back their $20,700 debt in 8.9 years on average. The proposed changes from the Australian government means that by lowering the threshold, around 183,000 more people will start paying their debt.

However, our $50 billion in student-related debt is nothing compared to the US$1.4 trillion in student loans in the US today.

One argument is that by letting students default on the debt, it would mean the ‘pricking’ of a bubble and create economic instability.

I disagree.

In fact, I reckon if the US doesn’t let students default on their debt, the US economy is well and truly finished for good.

The average US college student — who walks out of an education establishment with a degree — takes US$37,172 in debt with them. This is almost eight grand higher than the average US student debt in 2014 of US$29,400.

And Bloomberg says the 2014 figure is 74% higher than a decade before that.

The kids of America average a repayment of US$351 per month. While students are given a choice about the timeframe in which they would like to pay the debt, the minimum timeframe is 10 years. However, they can extend that to 25 years.

The problem is, the longer that money goes towards paying debt, the less money is spent within the US economy.

I suspect the H.R.2366 ‘Discharge Student Loans in Bankruptcy’ bill may have been in the works for some time.

Back in 2014, Federal Reserve Bank of New York economist Wilbert van der Klaauw noted that out of all the outstanding debt over 90 days, student loans had the higher delinquent rate of 11.5%, compared to 4.8% of mortgages.

He also pointed out the unknown factor of how this particular debt drags on the US economy, saying: ‘The associations definitely suggest that growing student debt is a drag on consumption. This is still something we’re discussing. There are a range of views on this. My personal view is that the increasing reliance on student loans for financing college education is going to be a drag on consumption for some time.’

Calling student loan debt a ‘drag’ is an understatement. The US is a consumption-based economy. In 2016, 79.5% of the country’s gross domestic product (GDP) came from services.

To keep a consumerist society running, people need to, well, consume.

Consumption is the little things we do every day. Things like haircuts, dinners out, soy chai lattes, gym memberships, and expensive smashed avo breakies.

All the things a consumerist society needs, but these young kids are crippled by debt and are less likely to spend their money.

Four years ago, Black Rock’s chief investment officer Rick Rieder noted that growing US student debts are ‘stunting the normal saving, investment, and consumption habits that ultimately serve as a guiding force of economic growth’. He added that if policymakers didn’t come up with an idea soon, the US economy could suffer.

The thing is, the younger generation is required to sustain the existing US economic model. But starting their working lives with crippling debt reduces their ability to consume.

Quite frankly, if the US wants young people to buy shiny useless things — to put inside enormous houses with matching cars in the double garage — it has no choice but to let them default on the college debt.

Kind regards,

Shae Russell,
Editor, Strategic Intelligence

Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia