More on Student Loans

There continues to be more discussion about student debt.  There was a great article a week ago in Barron’s, titled “What a Drag!”  Below, I’ve listed some of the key numbers and ideas (taken straight from the article).  The big takeaway seems to be that the amount of debt is large, it’s impacting the lives of graduates, but it’s unlikely to blow up like mortgages did.  It will be a hindrance on our economy and the lives of the debtors – it’s like having a second car loan (and for some people…it’s a really big, fancy car loan).  Here’s what the article said:

SIZE OF DEBT

  1. The Fed stated that there is $870 billion of student loans carried by 37 million people.  This is greater than total auto loans.  It’s also greater than credit card debt.
  2. The Consumer Financial Protection Bureau asserts that the debt is over $1 trillion when you include interest that has been capitalized (added to the outstanding balance).
  3. Two-thirds of the college seniors who graduated in 2010 had student loans averaging $25,250.
  4. Student debt borrowing by the 34-to-49 age range has soared by more than 40% over the past three years (the fastest of any age group).  This may be due to bad economic times that prompted many to seek more training.
  5. The 30-to-39 age group owes more than any other age decile, with a per-borrower debt load of $28,500.  The 40-to-49 age decile is next with a balance of $26,000.
  6. Loans to parents have increased 75% since the 2005-06 school year, to an estimated $100 billion in federally backed loans.
  7. Pell grants allow students to borrow up to $5,550 per year.  Federal undergraduate loans are capped at an aggregate of $57,500.

RISING TUITION

  1. There is research that argues that tuition has increased as a result of the availability of these loans.
  2. Private four-year college tuition and fees have increased 181% over the past 30 years.  Public four-year college tuitions have risen by 268%.
  3. In-state tuition at public universities averages $8,244.  Private tuition averages $28,500.
  4. Ivy League schools led the increase in prices during the 1980s.  They knew that there was demand for a limited number of seats.  There was also a signaling effect.
  5. State governments know that there is a large gap between private and public tuition.  This may mean that state governments will continue to cut appropriations to schools.
  6. For-profit schools derive 90% of their revenues from government loans (and the GI bill).
  7. For-profit schools account for 40% – 50% of all student-loan defaults.
  8. Schools often lack cost controls and have to pay for high-salaried professors, expensive presidents and provosts, huge administrative bureaucracies and lavish physical plants.

OTHER PROBLEMS

  1. Delinquencies are reported at 10% but may be double that when you properly account for things like loan-payment deferrals.
  2. Tuition is rising and income is stagnant.  That means that people need to borrow more (and that it’s harder to pay back).  Tuition and fees at four-year schools increased 300% from 1990 – 2011.  Over the same period, overall inflation was 75% and health care costs increased 150%.
  3. High debt levels (and weak job prospects) make graduates reluctant to buy cars, homes or spouses.  Weak family formation is not a promising sign for the housing market.

THIS IS NOT THE MORTGAGE MARKET

  1. Student loans are just one-tenth of the size of the home-mortgage market.  Subprime mortgages (including alt-A and option ARMs) were bundled into $2.5 trillion worth of securitizations at their peak.  In addition, all of this was amplified by credit default swaps.
  2. The bulk of the student debt is guaranteed by the federal government.
  3. The government has particularly strong collection powers.  They can garnish wages, take income-tax refunds or Social Security payments.
  4.  Student debt is generally not dischargeable in bankruptcy.
  5. The government claims to recover 85 cents on the dollar from defaulters.  Contrast this with credit card recoveries that tend to be closer to ten cents on the dollar.