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.