Analysis: Is the U.S. Student Loan Program Facing a $500 Billion Hole? One Banker Thinks So

Analysis: Is the U.S. Student Loan Program Facing a $500 Billion Hole? One Banker Thinks So

April 29, 2021

ABI Bankruptcy Brief

Analysis: Is the U.S. Student Loan Program Facing a $500 Billion Hole? One Banker Thinks So

In 2018, Betsy DeVos, then U.S. education secretary, called JPMorgan Chase & Co. Chief Executive Jamie Dimon for help. Repayments on federal student loans had come in persistently below projections. Did Dimon know someone who could sort through the finances to determine just how much trouble borrowers were in? Months later, Jeff Courtney, a former JPMorgan executive, arrived in Washington. And that’s when the trouble started, according to an analysis in the Wall Street Journal. According to a report he later produced, over three decades Congress, various administrations and federal watchdogs had systematically made the student loan program look profitable when in fact defaults were becoming more likely. The result, he found, was a growing gap between what the books said and what the loans were actually worth, requiring cash infusions from the Treasury to the Education Department long after budgets had been approved and fiscal years had ended, and potentially hundreds of billions in losses. The federal budget assumes the government will recover 96 cents of every dollar borrowers default on. In reality, the government is likely to recover just 51% to 63% of defaulted amounts, according to Courtney’s forecast in a 144-page report of his findings, which was reviewed by the Wall Street Journal. Courtney’s calculation was one of several supporting the disclosure in a Journal article last fall that taxpayers could ultimately be on the hook for roughly a third of the $1.6 trillion federal student loan portfolio. This could amount to more than $500 billion, exceeding what taxpayers lost on the savings-and-loan crisis 30 years ago, according to the analysis.​​​

Economy Grew by 1.6 Percent in First Quarter, Showing Signs of Boom to Come

The U.S. economic recovery picked up speed in early 2021, with the economy growing 1.6 percent in the first three months of the year amid a coronavirus vaccination campaign and massive stimulus spending from the federal government, the Washington Post reported. As Americans have begun to emerge from isolation and started spending again, construction surged and businesses invested in expectation of future growth. It appears likely that all coronavirus-era economic losses will be recovered by the middle of this year, according to data released Thursday by the Bureau of Economic Analysis (BEA). Some of the fastest economic growth in more than four decades occurred from January to March, behind only the initial 7.5 percent surge last year, when businesses first reopened following pandemic-related shutdowns. The quarter’s growth would be 6.4 percent at an annual rate, but annual rates can be misleading amid an unprecedented crisis, because they imply that a quarter’s trend will continue for an entire year. “We need to get used to seeing some big numbers, but also knowing to put them into context,” said Wendy Edelberg, director of the Hamilton Project and a former chief economist at the Congressional Budget Office. “There’s been nothing normal about this recession, and there will be little that’s normal about the recovery.”​​

Shoppers Return to Malls, with an Urge to Spend

Vaccinated shoppers are heading back to the mall, offering hope that the worst of the pandemic downturn is over for this beleaguered industry, the Wall Street Journal reported. Foot traffic at a representative sample of 52 malls in March was up 86% from the same month last year, according to mobile-device location data from analytics firm While that foot traffic was 24% lower than in March 2019, mall owners are suggesting that their business has turned a corner. Shoppers are eager to get out again, often armed with cash from the latest round of government stimulus checks. Many aren’t just browsing shops but dining out and returning home with bags full of new purchases. “There’s no question things are better. Sales are also better than anticipated four months ago,” said Bill Taubman, president and chief operating officer of Taubman Co. Shares of Simon Property Group Inc., which recently acquired Taubman, are up 45% this year. That is more than three times the gain this year in the S&P 500. The budding rebound in the mall industry echoes the progress made by other types of real estate, such as hotels, that were upended by the pandemic. But shopping centers and lodging have been on the mend also since the Covid-19 vaccine rollout and the recent reopening of much of the U.S. economy.​​​

Analysis: The Economy Is (Almost) Back, but Will Look Different than It Used To

There have been a lot of strange economic numbers over the last 14 months, as the world has been whipsawed by the pandemic. But one particular line of the first-quarter GDP numbers released Thursday stands out even so, according to an analysis in the New York Times. Americans’ spending on durable goods — cars and furniture and other goods meant to last a long time — rose at a stunning 41.4 percent annual rate in the first three months of the year. Yet the central reality of the economy in 2021 is that it’s profoundly unequal across sectors, unbalanced in ways that have enormous long-term implications for businesses and workers. The economy is recovering rapidly, and is on track to reach the levels of overall GDP that would have been expected before anyone had heard of COVID-19. But that masks some extreme shifts in composition of what the U.S. is producing. That matters both for the businesses on the losing end of those shifts and for their workers, who may need to find their way into the growing sectors. In such a tumultuous time, it helps to look at the GDP numbers not in terms of how they changed compared with last quarter or last year, but with the pre-pandemic economy. How does the actual number in the first quarter compare with what that number would have been if it had grown at a steady 2 percent annual rate since the end of 2019, the last quarter unaffected by the pandemic? This approach confirms the basic idea that the economy is not far from that pre-pandemic trend line. In the first quarter, overall GDP was only 3.3 percent below where it would have been in that hypothetical pandemic-free world. The U.S. is on track to surge above that 2019 trend in the second quarter currently underway, according to the analysis.​​​

Commentary: Give the Boss $10 Million, or They're Out of Here

“Pay to Stay” — the practice of companies’ offering fat retention bonuses to executives — is a recipe for trouble with shareholders and the public, according to a Bloomberg commentary. Top executives are accustomed to receiving hefty bonuses when they join a new company and large severance when it’s time to go. Lately, they’ve been getting lots of money just to stay put. Citing the need to retain top talent, Norwegian Cruise Line Holdings Ltd. and AMC Entertainment Holdings Inc. are part of a group of large companies that have offered bosses big retention bonuses recently. Hilton Worldwide Holdings Inc., Cineworld Group Plc and others have modified executive stock plans so their top employees aren’t tempted to hot-foot it. Reasonable or not, such rewards look bad during a period when ordinary workers have faced massive job insecurity and governments have propped up the economy, according to the commentary. It cements the impression that, fair weather or foul, executives can’t lose — and it could presage a frosty shareholder meeting season for big businesses. Companies will “need to explain how such awards do not merely insulate executives from lower pay,” proxy advisor Institutional Shareholder Services warns. In fairness, top managers bore no responsibility for the pandemic and they’ve had to work hard to protect employee health, reinforce supply chains and strengthen balance sheets. With the virus still undefeated, corporate boards are willing to pay bosses handsomely to ensure continuity. Meanwhile, many economies have rebounded quickly, giving managers leverage in pay talks as there are opportunities elsewhere. Yet despite top executives giving up some pay when the pandemic began, their overall compensation has remained very high. Designing a pay plan that keeps all stakeholders happy is difficult right now. If struggling companies are too stingy, they’ll trigger an exodus. If they’re too generous, executives could pocket undeserved windfalls if the shares rebound, according to the commentary.​​​

“Rewind” Any Annual Spring Meeting Sessions Through May 31

ABI’s Annual Spring Meeting has now concluded, but if you missed any of the hard-hitting sessions, replays are available through the innovative virtual platform. If you have registered for ASM, you can access the replays through May 31! Not registered? You can still sign up; click here.​​​

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New on ABI’s Bankruptcy Blog Exchange: No Bubble in Housing Market, Fed’s Powell Says

Federal Reserve Chairman Jerome Powell said that concerns of a housing bubble are overblown, but that the central bank is closely monitoring surging home prices that could make it more difficult for entry-level borrowers to obtain mortgage loans, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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