The future of student debt in the U.S.
A ticking time bomb
Debt Overview
The changing face of borrowing
In just two generations we have changed from a ‘pay today’ to a ‘pay tomorrow’ society. Where our grandparents would only ever consider taking out a loan for a major purchase, such as a house or a car, and that loan would be taken out with great consideration, today we don’t think twice about buying even the smallest things on credit as, after all, that is exactly what a credit card enables us to do.
The deciding factors today on whether a major purchase can be made or not are less influenced by sensible budgeting and rationale, but are instead governed by the ability to obtain, or not to be able to obtain credit for the purchase. Today, being in debt is normal, to the point where being heavily in debt is becoming the new norm, especially for the younger generation. For the younger generations, saving can begin later in life; today, life revolves around borrowing money and managing your debts.
Up until 2010, the volume of credit card
debt and debt for auto loans individually exceeded that of student loans. Between the last fiscal quarter of 2009 and the first fiscal quarter of 2010, that changed.
Student loans are a major growth area in the finance industry
Between 2004 and 2015 the amount of money owed on credit cards has remained relatively static at between US$0.7 trillion and US$0.9 trillion*.
Between 2004 and 2010 the amount of money owed for auto loans again remained relatively consistent at between US$0.7 trillion and US$0.85 trillion*.
At the beginning of 2004 the amount of money owed for student loans was US$0.263 trillion. By the beginning of 2010 that figure had risen to US$0.758* trillion. It had virtually tripled within six years.
By 2015, the amount of money owed for student loans had risen to a staggering US$1.23* trillion.
In the second quarter of 2018, student loan debt increased by US$29 billion**
As of June 2018, the amount owed for student loans stands at US$1.5 trillion, which is owed by 44 million students with an average debt of US$37,132**.
(Data source: * Federal Reserve Bank of New York, ** Forbes)
More student loans equals more bad debt
As of June 2018, the loan delinquency or default rate on student loans stands at 10.7% for 90+ days**
New delinquent balances on student loans (30+ days) stands at US$32.6bn**
(** Source: Forbes)
Student loan defaults are on the increase
Analysis of recently released data indicates that approaching 40% of borrowers who entered college in 2004 and who took out a student loan may default on that loan by 2023**. A study of student loans by Judith Scott-Clayton, non-resident senior fellow at Brookings Institution, has revealed that for students who took out a loan in 1996, the rate of default has continued to increase in the period between 12 and 20 years after taking out the loan.
(** Source: Forbes)
Areas of Particular Concern
Black students
Please note that the following figures are provided purely as observation. The intention is in no way to be critical of black students and, if anything, the intention is to highlight the problem so that black students can be offered greater levels of support. If one thing can be inferred, it is that challenges facing black students and repayment of their student loans needs to be addressed and greater support provided.
Higher levels of borrowing among black students and lower levels of repayment now see that 12 years after graduation, black students owe an average $43,372 more than white students.
Consequently, the default rate among black graduates is over five times that of white graduates (21% compared with 4%) and is still higher than that for white college dropouts (18%).
This is a continuing worsening problem: while 25% of black students who entered college in 1996 have defaulted on their student loan, for 2004 entrants that figure was nearly 38%. Projections for 2004 entrants already indicate that as much as 70% of black borrowers may default on their student loans by 2023.
Students attending for-profit institutes
Judith Scott-Clayton’s study also looked at the disparity in loans taken out and loan defaults between students attending public two-year universities and for-profit institutes. While just under 50% of students attending public universities take out a student loan, over 90% of those attending for-profit institutions take out a student loan.
This disparity is compounded by the default rates, which run at 26% for students attending two-year public universities and 52% for students who enroll in a for-profit institute.
The question that is raised here is whether degrees at for-profit institutes hold the same weight as those obtained from universities as, on the surface, there is little else to indicate why such a disparity exists. The increased default rate would lead one to believe that students who attended for-profit institutes were unable to obtain work that, on average, was as well paid as that obtained by students who went to public universities.
Understanding Why Student Debt Has Boomed
Secured loans can be more easily repaid if you default on them
If you default on a loan for a car, it is not unusual to have the car repossessed and once sold, you become responsible for any outstanding debt remaining. In relative terms, the balance owed, if any, is small in relation to the sum originally borrowed and can usually be paid off over a relatively short period of time.
If you default on your mortgage, once again you can either surrender the property, or have it repossessed. Either way, the mortgage company or bank can sell the property and you become liable for any outstanding debt. With the volatility of the property market during an economic crisis, such as that witnessed in the Great Depression of 2008, property values can fall through the floor, while interest rates can double or treble. Discharging yourself from the total amount of money borrowed for a house purchase if you default on
your loan can take more time as outstanding balances can be substantial, particularly in cases where there has been a high loan-to-value mortgage. However, the final amount owed in relation to the original size of the loan is usually greatly reduced
In both instances where you may find yourself falling behind with repayments, there are also opportunities available for refinancing, often as a means of reducing monthly payments to a more affordable level, even if the cost of refinancing is appreciably greater in the long term.
As a last resort, if a debtor finds themselves in a financial situation where they are going to struggle to pay back any outstanding loan, are swamped with debt – such as credit card debt, domestic bills, utility bills, etc. – then there is the option of filing for chapter 7 or chapter 13 bankruptcy as a means of discharging the majority, if not all financial responsibilities, the most noteworthy exceptions being taxes and student loans.
Student loans are not low-risk loans, but are provided as if they are
A 50% loan-to-value mortgage where the size of the loan is only twice the annual income of the borrower is seen as low risk. As a consequence, and while interest rates are low, the average interest rate for a fixed-interest 30-year mortgage according to ABC News on July 26, 2018 is 4.54 percent.
According to edvisors, for interest rates on new federal Direct Stafford student loans taken out for the 2018-2019 school year, undergraduate students will pay a 5.05% interest rate and graduate students a 6.6% interest rate, both fixed for the full term of the loan. According to credible.com, the average rate for parents and graduate students taking out a PLUS loan is 7.44%. These interest rates are relatively low for borrowing that is not secured on a fixed asset, especially when you consider borrowing on major credit cards, which is unsecured on any assets, attracts an average interest rate of 16.96% according to Creditcards.com. The rate of interest for student loans is low when one considers the following:
• There is no guarantee of a specific level of income after the student graduates, yet the level of borrowing can run into many tens of thousands, and even hundreds of thousands of dollars.
• There is no guarantee of long-term full-time employment for the borrower after they graduate.
• There is no guarantee the student will remain in full health throughout the term of the loan.
• There is no guarantee the student will graduate.
• There is no guarantee that the for-profit college will remain in operation – its closure can see
federal loans adjusted accordingly, but private loans are not adjusted. • Higher interest rates create a vicious cycle of increasing the level of repayment, thus increasing the likelihood of default.
Thus, in looking at the consequences of taking out a student loan, the chances of students finding themselves in a financially difficult position in the longer term are appreciably higher than those who take out loans for a car or house purchase.
Once again this plays nicely into the hands of the ‘profiteers’ whose business it is to make money from people who are struggling to service, among others, their student loans.
Why do student loan default rates increase over time?
A student loan is not like a five-year car loan, for many it is a loan that will be with them well into their adult life and can and will last up to twenty years, even though for federal student loans the borrower is expected to pay off their debt in under ten years with a standard repayment plan.
For those students who are unable to pay off their student loan in under ten years, there is every likelihood that during the period of that loan, they have taken out other loans, such as for a car or to buy a property – many who get married and start a family still have outstanding student loans. The cost of raising a family when combined with a loan for a car, a house and outstanding student loans can create a crisis point.
The National Association of Realtors released figures in 2017 revealing that 40% of first-time home buyers still had outstanding student debt, despite the fact that most first-time homeowners defer buying their first home for an average seven years. The greater the level of debt you are in and the longer you are in substantial debt, the greater the chances you will default on your borrowing, especially today when there is no such thing as a ‘job for life’ as was more the case two generations ago. Redundancy is more relevant today than it was for our parents’ or grandparents’ generation.
The amount of money being borrowed for a student loan has also increased substantially because, even allowing for inflation, college fees are rising more rapidly
College fees are continually rising, and at a level above inflation. There has also been a surge in the number of for-profit educational institutes which, by their very nature, require greater borrowing levels to attend. According to Jennifer Ma, policy research scientist at the College Board and co-author of a number of reports in 2017: “Despite the moderate increases in average published prices, there were considerable increases in net tuition and fees over the past few years. These increases, combined with stagnant incomes for many families, raise concerns about ensuring educational opportunities for low- and moderate-income students.”
Allowing for inflation, the cost of a college education for a student in full-time education at a public institution four-year course rose 16% between 2008 and 2018. Between 1988 and 1998, the cost rose only 4% and between 1998 and 2008 it rose 4.4%, according to a Collegeboard publication on trends in higher education.
According to Marketwatch, the cost of an undergraduate degree in 1987 (in today’s money and adjusted for inflation) was US$39,643. In 2016, that figure had jumped to US$103,616.
College fees have risen dramatically over the last thirty years, but salaries haven’t.
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