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.
Tell us what you think about the site
Customer Care »
Vacation stops, manage subscriptions and more
AJC Services
Sections
Other Editions
Visitor Agreement | Privacy Statement
© 2013 The Atlanta Journal-Constitution
26 comments Add your comment
SAWB
February 5th, 2013
7:27 pm
My Niece currently attends college fulltime and works about thirty hours a week. She generally completes each semester with very little if any debt and expects to graduate in a similar position. So, a person can complete college without a lot of debt, but they do have to manage their educational process properly.
Be realistic about what college you attend not everyone can afford to attend Emory. Smaller less expensive schools offer the same classes and often more faculty attention than larger schools. While a degree from a top notch college may get you your fist job the actual location becomes less important with subsequent jobs.
Realize that college is not an entitlement. If you don’t have the money for college don’t assume you are entitled and take out a big loan. Get a job and pay at least part of your own way after all it’s your education.
Look for alternative sources for funding. There are civic, religious and other organizations that offer partial scholarship or one time gifts. Also, remember many employers will offer educational reimbursement. My cousin went to a Technical College and received a two year nursing degree. Then the hospital she worked for paid for her to earn a bachelors degree. Now, she is a nursing manager and makes very good money, but she never accumulated one penny of debt.
An observer
February 5th, 2013
7:39 pm
Going into debt to attend college is not a smart idea.
meno
February 5th, 2013
8:00 pm
I think it is short sided to for Mr. Colas and Ms. Miller to be so dismissive of degrees in things like Spanish and Political Science. Not only should we consider the benefits (which cannot always be economically quantified) of having a citizenry that can better understand its diverse members and political on-goings, but employers often complain about the kinds of interpretative and critical thinking skills fostered by the liberal arts not being present in the STEM graduates they hire.
Student loan debt: Danger Zone | Mortgage,Forex,note buyers, donate a car, investment fraud, content management,
February 5th, 2013
9:39 pm
[...] post Student loan debt: Danger Zone appeared first on ForexNews.com. [...]
Starts at the top
February 5th, 2013
10:38 pm
The availability of cheap easy money is directly related to the rapidly rising costs of college. This is basic economics people. Colleges and Universities don’t want you to actually think about the fact that they KNOW you can get your hands on whatever amount of money they choose to charge for their questionably useful product/service. Government involvement in this sector of the economy has done exactly the same thing it has done in every other sector – destroyed it (and distorted it). Everyone loves that they can get low interest rate loans for worthless degrees until the bill comes due, and they are so happy that they can go to college that they don’t bother to use their education to actually look at the consequences of what they are praising. Idiots. Sheep.
The answer is to END ALL government involvement in education. K-12 and beyond, and that includes cheap easy money. There is a market. Let it work. Let colleges and universities figure out how to cut costs to make college affordable again. Allow more competition in the marketplace, but don’t just put a big pile of money in front of everyone.
Again, basic economics.
Laurie
February 6th, 2013
8:08 am
It’s been my experience as well that the university you graduate from may get your foot in the door, but it becomes less of a factor after a person starts working in their choosen field. Don’t waste your money on a private institution. Start at a local community college and transfer to a state university after completing the core coarse work. Also remember, college is not for everyone.
agent
February 6th, 2013
8:30 am
It’s very simple…if you take out a student loan for college, you pay it back. Period. Anyone that doesn’t think they have to pay back money that they BORROWED is a complete moron.
Guest
February 6th, 2013
8:46 am
“Be realistic about what college you attend not everyone can afford to attend Emory.”
Emory is free for students whose household income is less than $60K; for those from households earning less than $100K, tuition is capped at $15K for all four years.
commoncents
February 6th, 2013
8:57 am
Whoa, slow down there, Meno… I think you missed the point. The are not dismissing those degrees, but are simply suggesting that it isn’t a bright idea to take out almost $30k for a loan to obtain a less-than-desirable degree that at the same time has a work field that yields some of the highest unemployment numbers.
Also, are you suggesting that STEM (Science, technology, engineering and mathematic) graduates are not critical thinkers? I don’t recall hearing of or seeing any engineering firms or scientific research institutes lamenting on the fact that their engineers and scientists could be better employees if they only majored in photography or basket weaving instead.
I’ll wait for your rebuttal on what “interpretative and critical thinking” you think liberal arts majors would bring to an industry which relies on STEM students…
williebkind
February 6th, 2013
9:05 am
College is not about education! It is about a certificate. 50% of college graduates are unemployed and have been unemployed for two years. Now tell me how valuable that degree is for the employer after two years. Most students cram and dump on tests and do not retain very much and what they do retain is for short periods. It is a joke. Unless you train for a skill, college graduates performances are no better than OJT’s. You can also get soaked by the college because it is for profit.
If you take the loan out and dont graduate for what ever reason, I would think about not paying it back.
agent
February 6th, 2013
9:11 am
willie,
Paying back a student loan has nothing to do with graduating. You borrow, therefore you pay back. It’s really that simple.
agent
February 6th, 2013
9:12 am
Also willie,
If you’re dumb enough to major in underwater basketweaving, then you deserve your unemployment.
williebkind
February 6th, 2013
9:17 am
How are you going to pay it back AGENT?
williebkind
February 6th, 2013
9:20 am
“If you’re dumb enough to major in underwater basketweaving, then you deserve your unemployment.”
And you deserve to have to pay my school loans for allowing that to happen in the first place.
meno
February 6th, 2013
9:20 am
Commoncents, I’m talking about the very common lament that college educated workers are lacking in the basic “soft skills” (like understanding of different ways of thinking, clearly communicating, and abstract thinking). Employers often say they can train workers in the nuts and bolts of the job but not these abilities–which are crucial to job success.
That you would equate philosophy with basket weaving shows your lack of a philosophic education. Did you know philosophy majors have the best graduate school entrance test scores?
agent
February 6th, 2013
9:23 am
Willie,
Don’t take take the loan if you CAN’T pay it back. Nobody is forcing you take a loan. Go to a community college, work and save money, and transfer into a larger school.
People like you are the problem. You think you’re owed something.
Guest
February 6th, 2013
9:25 am
“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.”
Ironically, the two “software and technology firm” analysts who wrote this, Nicholas Colas and Sarah Millar, majored in near eastern archaeology and Hispanic studies/political science, respectively.
agent
February 6th, 2013
9:25 am
Meno,
How’s that philosophy degree working out for people who can’t find jobs.
Willie,
“And you deserve to have to pay my school loans for allowing that to happen in the first place.”
How did I let that happen?
ATL Born and Raised
February 6th, 2013
9:26 am
And to everyone crying “STEM majors!”: There are plenty of those unemployed and underemployed as well. It’s bleak out there for everyone.
woody
February 6th, 2013
10:05 am
Young people are steered straight into loans by financial aid departments at colleges and universities. It’s a sales technique, not appreciably different from what takes place on a used car lot. That the price might actually be too high to afford, is made unclear by the availability of ‘low interest’ loans. I think education is the single most important thing you can spend money on, before you buy a car or a big wide TV set. But there is a lot of bad advice out there about how to pay for it.
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.
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.
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.
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.
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?
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.