Getting Schooled in Credit

 | Feb 23, 2012 | 9:30 AM EST
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Consumer credit and spending are increasing, which is important because consumer spending is the driver of economic activity -- everything else in the economy follows it, including capital investments and job creation. Expanding consumption is the first sign that a virtuous cycle of activity has begun, and expanding consumption may be signaling an increase in consumer credit. Consumers typically increase their use of credit for consumption purchases when they are confident that they will have enough income to service the new debt.

The two largest consumer sales predicated on credit are for autos and homes. Although confidence in the housing market is still shaky and hasn't performed in line with indications that the economy is expanding, autos sales have. Aggregate consumer credit has increased at about a 10% annualized rate over the past few months and much of it is attributed to new car sales, which have risen since last summer because credit availability has loosened.

Subprime loans for autos were as popular with lenders and consumers as they were for home mortgages five years ago, but that essentially ended with the subprime mortgage bust. As a result, auto sales plunged along with home sales because borrowers couldn't get loans. That market has come back of late, and within the past 24 months, the percentage of auto sales financed with subprime loans has increased to about 50% from about 30% of the market.

The fact that both lenders and borrowers are increasingly confident in their willingness to lend and their ability to borrow is a positive sign of economic activity.

But I offer this news with a caveat. Although the increase in lending of this kind is increasing, it does not account for the total increase in consumer loan activity. There has been an even larger increase in student loans over the past few months and at an increasing rate, which accounts for about 70% of the total increase in non-revolving consumer debt.

Usually student lending is a positive sign of an increase in confidence by students and their parents with respect to their ability to service this debt in the future and gain an increase in income greater than the costs borne for the education.  There is a troubling issue developing, though, that may be counterproductive in the future. The increase in student loans is almost completely attributable to older people going back to school, with the bulk being in the 40- to 50-year-old range.

These new older students are choosing this path because whatever career or job path they were on is no longer available.  Many are attempting retrain for employment in the health care and education fields, two segments of the private sector still experiencing an increase in jobs. Others, late in life, are attempting to increase their career options by getting an MBA, Ph.D., or law degree.

These older students, however, will now be competing with their children for the same jobs and will have fewer years of gainful employment with which to service the new debt they are taking on. Many will find themselves in even worse financial and debt position and will have to default on their debt. 

But the financial benefit (defined as a real gain in income) of a formal education completed on a full-time basis after the age of 30 is almost nothing. The purpose of a formal education is to position one's self for the most advanced first-career position possible, as the greatest determinant of financial success in a corporate environment is where in the hierarchy an individual starts. There is no historical precedence for middle-aged students attempting to start over on a new career path with a new education.  We'll just have to wait and see how it turns out

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