Political Calculations
Unexpectedly Intriguing!
April 25, 2017

The Consumer Federation of America recently put out a press release that reports that they've found that 1.1 million student loan borrowers in the United States have gone 270 or more days without making payments on their Federal Direct Student Loans, with more than $137 billion worth of the loans issued by the U.S. government now qualifying as being in default by that standard.

Data from the CFA's press release has made the rounds among multiple news outlets, but we have a pretty basic question: Are those big numbers?

They certainly seem like big numbers, what with all the millions and billions being thrown about, but how do these numbers fit into the bigger U.S. government-issued student loan story?

We decided to dig down into the press release's details to find out. Let's start with the biggest numbers, where we discover that $137 billion worth of Federal Direct Student Loans are in default, against the larger total of $1.3 trillion worth of Federal Direct Student Loans that have been issued through the end of December 2016.

Federal Direct Student Loans, Amounts in Default and Not in Default as of December 2016

Here, we calculate that the percentage of student loans that have gone 270 or more days without having had a payment made upon them represents about 11% of the total amount borrowed. That means that some 1.1 million people whose student loans require that they make some sort of scheduled payment went more than 9 months without making any.

To tell if that's a big number or not requires that we put that number into some kind of context. Here, we'll draw on the U.S. Federal Reserve's data for the delinquency rates on loans and leases issued by all commercial banks in the U.S., where for the fourth quarter of 2016, we find that the total delinquency rate is 2.04%. That value had previously peaked at 7.4% back in the first quarter of 2010, following the bottoming of the Great Recession.

But another important thing to consider is that delinquency rate would include all private-sector issued loans and leases that have payments that are past due, including those that have gone without payment for much less than 270 days. That figure tells us that the default rate of 11% for Federal Direct Student Loans is, to put it in Trumpian terms, "Yuge!"

Going by the standard of simple delinquency, the WSJ reported back in April 2016 that 40% of student loan borrowers were delinquent on their scheduled student loan payments, meaning that they were at least 15 to 31 days behind.

The next question that we'll tackle is whether the 1.1 million student loan borrowers who have defaulted on making payments on their Federal Direct Student Loans is a lot. The following chart shows how they fit into the total number of 42.4 million Americans who have taken out Federal Direct Student Loans.

Federal Direct Student Loan Borrowers, Number In Default and Not in Default as of December 2016

Here, we discover that the 1.1 million Americans that have defaulted on their Federal Direct Student Loans is about 3% of the total number of Americans who have borrowed money from the U.S. government to pay for a university or college education in the United States.

What we find here is that a relatively small portion of the total population of federal student loan borrowers is responsible for the very high default rate for the Federal Direct Student Loan program. 41.3 million, or 97% of student loan borrowers, have not gone 270 days or longer without making their scheduled student loan payments to Uncle Sam's hired student loan servicers.

The combination of low number of defaulters and relatively large amount of defaulted student loans tells us that these individuals have truly racked up what might be considered to be gargantuan student loan debt. Let's next find out how much debt that is.

Average Federal Direct Student Loan Balance, Number In Default and Not in Default as of December 2016

The average student loan balance in the U.S. is $30,650. For Americans who haven't defaulted on their student loans, that average figure drops to $28,150. But for Americans who have defaulted on their payments to their U.S. government creditor, the average balance on their Federal Direct Student Loan is $124,545.

To put that latter number into context, consumer personal finance site Nerdwallet reports that the average amounts of debt for the U.S. households that report having the indicated kind of debt for 2016:

  • Credit cards: $16,748
  • Mortgages: $176,222
  • Auto loans: $28,948
  • Student loans: $49,905
  • Any type of debt: $134,643

The average amount of a Federal Direct Student Loan in default for a single American is nearly two and a half times greater than the combined student loans for Americans living in a single household. At the same time, their average $124,545 default balance is really only comparable to the $134,643 average American debt-laden household has for all their debts, which is combining multiple kinds of debt among multiple individuals.

Because the U.S. Department of Education, which administers the Federal Direct Student Loan program, borrows money through the U.S. Treasury to issue these student loans, it must charge all borrowers a higher rate of interest to make up the $137 billion gap in its direct student loan program that is caused by a small minority of borrowers, or else U.S. tax revenue must either be diverted or additional money borrowed to make up the difference in paying back the U.S. government's creditors.

The U.S. student loan implosion therefore has a very real cost to both U.S. taxpayers and to Americans seeking to borrow money from the U.S. government to pay for their higher education.

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April 24, 2017

There's an old saying among coders, the polite phrasing of which goes as follows: "To err is human; To really foul things up requires a computer."

We definitely had a mischievous daemon do a number on us last week, where we managed to repeatedly refer to Week 2 of April 2017 as being Week 3 of April 2017, with all references to the week being consistent with a week further ahead in time than the week we were describing (now since fixed)!

So if your last contact with us was that post, and you've now come across this one, that's why it seems like we're talking about the third week of April 2017 again, when in reality, we really are reviewing Week 3 of April 2017 this time. Really!

So let's start with the most significant observation we can offer about what happened to the forward-looking outlook of S&P 500 investors during the third week of April 2017, where we think that the news of the week combined with the onset of earnings season to shift investors more strongly toward focusing on the current quarter of 2017-Q2 as being the most likely period in which the Fed will next hike short term interest rates in the U.S. by what appears to be a 2-to-1 margin.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 21 April 2017

That's a significant shift compared to what we've seen over the last several weeks, where that probability has ranged near the 50-50 mark, keeping within a narrow margin of an even split.

As for why that's our thinking, here are the headlines we flagged during the week to provide the context in which stock prices reacted. You'll notice that we're starting to pick up news headlines related to the potential shutdown of portions of the federal government as early as Week 4 of April 2017, mainly because it's another element of noise to add on top of the noise from other geopolitical concerns. Outside of noise, history indicates that particular event would be pretty much of a nonfactor where the stock market is concerned, where even a prolonged event would have little to no economic impact as well.

Monday, 17 April 2017
Tuesday, 18 April 2017
Wednesday, 19 April 2017
Thursday, 20 April 2017
Friday, 21 April 2017

This was a day that began and ended in France as a greater geopolitical concern....

That's it for the overall context of the market's forward-looking concerns this week, where we've definitely erred on the side of documenting the week's high noise to signal ratio. Be sure to follow this link for Barry Ritholtz's succinct summation of the week's pluses and minuses for the U.S. economy and markets for that additional context and a touch more signal.

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April 21, 2017

We're playing with a new online data visualization tool (for us): Datawrapper, where we've taken data from a press release issued by the American Society of Plastic Surgeons indicating the average cost and number of cosmetic procedures performed in the U.S. during 2016 and visualized it. The results are below....

If you're accessing this article on a site that republishes our RSS news feed, please click here to see the chart (we won't know until after this post has gone live which, if any, republishing sites will have any issues displaying it - it's all part of the test drive process!)

Now, for good measure, here's a map we generated that indicates each U.S. state's most searched cosmetic procedure according to the Plastic Surgery Portal.


Same rules apply as before!

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April 20, 2017

The U.S. stock market has, for the most part, behaved in a very orderly fashion since the first quarter of 2016 ended just over a year ago.

But since 1 March 2017, when the S&P 500 reached its all-time record peak closing value of 2,395.96, the S&P 500 has dropped diagonally by three standard deviations from that peak value with respect to its fundamental trendline, as determined from the relationship between its value and the S&P 500's trailing year dividends per share.

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 September 2015 through 19 April 2017, with period of order since 31 March 2016

To be fair, some would call that reverting to the mean, but since the S&P 500 peaked on 1 March 2017, the news that influences investors expectations for the future has been characterized by two main themes:

With all these things going on, a good question to ask might be how much more would it take for the S&P 500's nearly 13-month old period of order to finally break down?

As you can see in the chart, the answer is something of a moving target, but if it were to happen today (20 April 2017), it would take a decline of 56 points, or 2.4%, from its 19 April 2017 closing value of 2,338.17.

That also assumes that order in stock prices can be described by something that looks like a normal distribution with respect to the mean trend line of the relationship between stock prices and their underlying trailing year dividends per share, which is not strictly true, but does make for occasionally useful observations.

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April 19, 2017

One of the crazier things about the U.S. national debt is that it often takes a lot of months after the end of a given fiscal year for the U.S. Treasury to sort out who the U.S. federal government owes money, particularly when when that money is owed to foreign entities.

So here we are, just over halfway through the federal government's 2017 fiscal year, before we have a good idea of how much U.S. government-issued debt was held by its major foreign creditors at the end of the U.S. government's 2016 fiscal year, which ended on 30 September 2016! The following chart reveals who the biggest holders of the U.S. national debt were as of that time:

FY 2016: To Whom Does the U.S. Government Owe Money?

Officially, the U.S. government's total public debt outstanding is divided up into two parts: the "Public" portion of the national debt....

FY 2016: Who Owns the Public Portion of the U.S. National Debt?

And the so-called "Intragovernmental" portion of the national debt, where the latter category represents money owed to various trust funds established and operated by the U.S. government.

FY 2016: Who Owns the Intragovernmental Portion of the U.S. National Debt?

Right now, we can see that Social Security's Old Age and Survivors' Insurance Trust Fund accounts for a little over half of the Intragovernmental portion of the U.S. national debt, which works out to be nearly $2.8 trillion, or about one-seventh of the U.S. government's total public debt outstanding.

If Social Security's Trustee's are right, that number will steadily shrink to zero over the next 17 years, as that debt is cashed in to pay retirement benefits to Social Security recipients. When that number does reach zero, Social Security's Trustees have indicated that the program will be forced to revert to the program's original Pay-As-You-Go basis, where benefits can only be paid out of the payroll taxes that fund Social Security. When that happens, they predict that all Social Security benefits will need to be cut by 21%, unless Social Security's payroll taxes are increased from 12.4% of earned income (which is currently equally split between employers and employees) up to 15.78% of earned income.

Data Sources

U.S. Treasury. The Debt To the Penny and Who Holds It. [Online Application]. 30 September 2016.

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 6 October 2016. [Online Document].

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 13 April 2017.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2016 Through September 30, 2016. [PDF Document].

Social Security Board of Trustees. The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. [PDF Document]. 22 June 2016.

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