Crisis: Student loan debt

By Rick Badie

When it comes to student loan debt, the news continues to grow dimmer. Defaults are on a disturbing uptick. So is the average amount of an educational loan. In 2012, the average borrower’s loan topped $27,000, a 58 percent increase in seven years, according to research by FICO Labs, an analytical firm. Today, a guest writer says we have reached the “danger zone,” while co-authors of the other essay question the worth of a college education.

Student loan debt will hamper economy

By Andrew Jennings

What is the next financial crisis threatening to ripple through the U.S. economy?

Student loan delinquencies.

This may surprise some people. After all, bad student loans don’t have the same domino effect as mortgage foreclosures, which bring down property values, reduce the real wealth of homeowners and affect related businesses, such as furniture manufacturers and construction companies.

However, the situation in student lending isn’t pretty. It appears to be getting significantly worse. And make no mistake, widespread defaults on student loans will hamper the economy.

According to the Federal Reserve Bank of New York, outstanding student loans reached nearly $1 trillion ($956 billion, to be exact) in December 2012. That’s more than Americans owe on credit cards. It’s more than Americans owe for anything other than their home mortgages.

My team of analytic scientists examined this situation recently and discovered some disturbing trends:

The size of the average student loan debt grew by 58 percent, from $17,233 in 2005 to $27,253 in 2012.

Delinquencies on student loans grew by 22 percent from the three-year period of 2005-2007 (for loans originated in late 2005) to the three-year period of 2010-2012 (for loans originated in late 2010).

Meanwhile, the average credit card balance and the average balance on car loans in the U.S. actually decreased from 2005 to 2012. So at a time when Americans were trimming debt, student loans were climbing faster than ever.

This is not sustainable. The growing delinquency problem is a predictable result.

In the short term, student loan delinquencies are draining billions of dollars worth of spending power from our delicate economy and casting a dark shadow over the financial future of graduates. As they miss payments and their credit scores plummet, they become less desirable to lenders. They lose their ability to fund their post-graduation lives.

In the long term, if people fear they can’t shoulder the costs of higher education and turn away from our colleges and universities, innovation will be stifled, and we will be less competitive in the global marketplace.

While there are no simple answers to the problem of student loan delinquencies, I believe the underlying issues are the cost and financing models for higher education. We must tackle these challenges with urgency, creativity and commitment.

We should explore a wide range of options, such as encouraging the private sector to help put students through college, expanding the use of technology to reduce school costs, and making pricing information more transparent and understandable so prospective students can comparison shop. We should also look at how other countries, such as the United Kingdom, have successfully addressed the rising cost of education.

And we must provide much better financial education for students, equipping them to navigate the borrowing and repayment processes.

Our challenge is finding solutions that encourage personal responsibility without sentencing former students to decades of financial suffering. A college diploma is a ticket to a more prosperous future.

Andrew Jennings is chief analytics officer for FICO.

Education warrants the cost despite hefty price

By Nicholas Colas,  Sarah Millar 

Several months ago, we at ConvergEx tackled a question that has dominated media headlines around the country: Is college really worth the money, particularly if you have to take out loans to get there?

Our answer was a resounding “Yes.” While the average cost of a 4-year degree for the Class of 2011 was more than seven times the cost of a diploma in 1981 ($73,500 vs. $10,050), far outstripping growth in personal income, the utility of that education warrants the cost.

Consider the historically lower unemployment rates for college grads, even during the Great Recession: After 2008, unemployment for this group jumped only 1.6 percent in two years.

High school diploma holders saw a rise of 4 percent. Secondly, lifetime earnings for a person with a college degree continue to outpace those for someone with only a high school diploma by more than $1 million over a 40-year career at median earnings.

At what point does a college education cost too much? By taking the residual values of a high school grad’s and college grad’s incomes, and subtracting the former from the latter, we came to $715,000. Student loans, of course, play a huge role in determining whether college is still “worth the money.” But when we calculated the cost of standard and extended repayment plans for a student who took out the average loan of about $27,000, we found that the college graduate still held the economic advantage. This, despite the dreaded years of repayment and added interest which, over the course of a 10-year loan, brought the total cost of his/her college degree to $85,700, $12,200 more than the sticker price.The college graduate’s post-tax income will be almost double that of a high school graduate the first year out: $38,950 vs. $21,500. The college grad’s income will also grow at a faster clip.

While a college degree certainly gives one a better chance of employment and a better salary, these benefits may depend heavily on the type of degree and education quality. Bachelor’s degrees in Spanish and political science are not so desirable: Language majors face an average unemployment rate of 10.2 percent, while the rate for political science degrees is better but not great at 6 percent. Majors in the fine arts, U.S. history and clinical psychology face jobless rates of 16.2 percent, 15.1 percent and 19.5 percent, respectively; most have lower-than-average compensation.

As for quality, a college education is considered a differentiated good in the marketplace. A student with an Ivy League degree is often valued more highly than a state-school graduate, though the field of study may give one or the other the advantage.

In short, the “average” outcome of a college education — lower unemployment and higher lifetime wages — still validates the cost. But a degree in non-Western poetry isn’t the same as a bachelor’s degree in petroleum engineering. Caveat emptor applies in all things, including education.

Nicholas Colas and Sarah Millar are staff members at ConvergEx Group, a worldwide technology and software firm.

26 comments Add your comment

N-GA

February 6th, 2013
2:16 pm

The data needs a lot more analysis. Here are a couple of questions:
1. What % of defaults were for loans for students at “for profit” schools vs non-profit schools?
2. What % of defaults were for loans to students who failed to graduate vs student who did graduate?
3. Are there any credit criteria involved in making the decision to loan someone money for education?

Not everyone is college material….PERIOD! If you are turned down for admission to a state/public school, the lender should look long and hard at lending you money to attend a “for profit” school.

BT

February 6th, 2013
1:27 pm

Real simple…lower the interest rates of the loans so they can be repayed. But when you have graduates entering the work place with no jobs, what do you expect. I have never figured out why you save money at 3% and borrow it at 20%. It seems to me it ought to be the other way around. How do you spell greed?

Wayne Offermann

February 6th, 2013
1:03 pm

It isn’t the loan payback thats the problem. Try to find out the date last payment for the loan is. Also, try to find out the actual loan amount verses all the late fees and charges that were added to the loan. Lets not forget the 10 calls a day from Sallie Mae wanting you to go paperless. The loan payback has to be structure to the individuals income without penalties. The penalties and hidden cost are 300 times what the orginal loan was when the money was borrowed. They also done away with consolidating student loans, so now a person has eight loan payments a month instead of one payment. These are areas that need to be addressed. Disclosure of the loan throughout the life of the loan has to be available. Yes, I do pay my student loans all 3 of them. I graduated from college with loans at the age of 44. The loan program is no different than Freddie and Fannie Mae operated program. It is a mess. Students get to the point they don’t want to pay the money back because of the harrassment and lack of help available from the loan system. ACS billed be wrong 11 times out of 12 because I made the payment a day early so it would not be late. I found out if I pay the loans past the due date their is no problem or late fees accessed to the loan.

xxx

February 6th, 2013
12:03 pm

How or why you got in dept is not relevant. Folks asked for the money when they needed, taxpayers ponied up to the tune of almost 1 trillion. Time to give us our money back.

MANGLER

February 6th, 2013
11:40 am

Unlike most other types of loans, student loan payments can be negotiated and renegotiated time and again on a very specific and personal level. Except in the utmost circumstances where the student can’t afford $50/mo – and sometimes that happens, most if not all lenders will working with you to lower the payments and extend the time. That’s either convenient since student loan debt does not fall from your credit history like many other debts do, or that’s because of it. It makes more money for the lender in the long run but can potentially save the students credit.
Just because your repayment vouchers say $1,100/mo, if you can’t do that, they will work with you. I know people who had to negotiate from that $1,100 down to $50 for a few months, and that was only as a show of good faith. Lenders know times are hard right out of school.

MrLiberty

February 6th, 2013
10:48 am

It is the very presence of easily available money that encourages people to get degrees in underwater basketweaving (that was the same joke major we all used when I was in college in the 80’s – wow!). If one actually had to save, work, etc. to pay for college, not only would costs go down (as there would be less available money and fewer students), but people would also be forced to measure the true value of the education they are about to pay for. Sadly we have also turned education (from the K-12 range on up) into Training rather than the exploration of information for education’s sake. This is the reason why employers are disheartened by the graduates they have applying for jobs. Nobody is taught how to think anymore. You cannot learn a “trade” in college. You cannot be fully trained for a specific job at a university. What you can be is taught how to learn (although that SHOULD be going on in K-12 but sadly is not) and given the enthusiasm to be able to learn what is needed to be a success at a job.

Again, get the easy money out of the equation and the problems will begin to work themselves out.