https://www.nytimes.com/interactive/2018/08/25/opinion/sunday/student-debt-loan-default-college.html
Climbing default rates are somewhat worrisome to me. Higher defaults today not only mean less money available to the students of tomorrow, but they’ll be borrowing that money at even higher interest rates. Realistically, the US Government is not going to do much to help. The money just isn’t there. We’re already seeing colleges closing (tightening supply) however, demographics are pointing to fewer students for the next 5-15 years (tightening demand). It’s going to be interesting, for sure.
This is the thinking of many people. ‘10% default is not too bad.’
REALLY? I used to work for high risk lenders. Our default rates were 10% in some states (that was BAD) and our rates were as high as 36%. We built that 10% default rate into our fees and interest rates.
Before 2008, the default rates at banks for secured loans was about 1-1.5%. When they rose to 2%, those banks were in trouble. Their unsecured rates were below 10% (credit cards, personal loans). and it WAS that bad.
10% is a high rate, especially since these loans are at 4-7% rates, so the income from the loans that are being paid isn’t enough for the government to recoup the losses. The government, and thus the taxpayers, will eat the losses.
However, most lenders have limited upside (the high interest rate that they can collect if the loan does not default). The government’s upside to offering student loans that help a person attend college instead of not attending college is a lifetime of the person’s increased earnings which improves the economy and pays greater taxes. The same is the reasoning why states have subsidized public universities and community colleges, and the national government offers Pell grants.
Of course, that viewpoint is unpopular now, so we can expect a continuing shift toward parental funding of college, so that, even more so than today, more people’s college opportunities will be mainly based on parental money (or lack thereof) rather than their own academic achievements.
the government can decide to fund more university programs if it wants to, but when it calls it a loan, it should be treated as a loan and the loans made under terms that make it a successful business arrangement.
I think that a 10% default rate is worrisome, and it is likely to get higher. I can see some similarities to the 2008 subprime mortgage bubble.
High school seniors are kids. They have very little idea what $10,000 really is or how hard it is to come up with this much money. Forget about $280,000 for four years at a private university. I don’t think that they understand what it is going to take to pay off an education loan, or how marginal it will be just living on what the average college grad makes right after graduation (ignoring engineering, computer science, nursing and a few other students who can make decent money on graduation).
“Forcing these students to borrow has turned one of America’s best investments in socioeconomic mobility — college — into a debt trap for far too many.”
I agree with this. I am not sure that there is much we can do about it. We can warn students here on CC not to take on too much debt. We can continue to point out that there are a very large number of very good universities, and that for most students there is no need to pay $70,000 per year to get an excellent education. Increased funding for state schools would help some students.
It seems that trying to forbid college loans to students who are not likely to be able to repay it could be seen as denying deserving students the ability to attend university. However, allowing 18 year olds to take on a catastrophic debt is not a caring and responsible approach either. In the case of my daughters I was willing to be the bad guy and say a big NO to loans (although one of them was just as determined as I to avoid loans). Perhaps each parent has to be the “adult in the room” when these decisions are made.
The scary part is that the article says that the default rate is up to 30% in the years after the no longer track it. That’s unacceptable and frightening.
I disagree about the government not doing anything in the future. Sooner or later there is going to be a massive bailout of student debt. My advice to everyone always is to delay for as long as practical repayment of student loan principal. Just as in the housing fiasco just a few short years ago (how fast we forget?), you never know when the taxpayer will be forced to bail you out.
There will be no need of a bailout like with bad mortgages which spread throughout the banking system. Government student loan losses become part of government spending, though such costs are small compared to the amount of budget deficit increase through recent politicians’ actions. Private student loans (a small fraction of the total) require cosigners with sufficient income and credit standards.
Before jumping to solutions, one needs to thoroughly examine where the problem is. How much of this default is undergrad vs. grad? (Hint: more of the latter.)
How much is non-profit vs. for profit schools? (hint: more in the latter)
So, perhaps the author should be more clear on where we ‘need’ to make the investments…of course, that would lost the focus of his opinion piece since not many would want to invest more resources in University of Phoenix or more grad degrees in many non-STEM fields.
The author/article has an excellent graph showing how much debt is from the for profit schools relative to the others.
Own your debt! Irks my soul these people that take out 100k of loans for a degree in “xxxxxx” then whine and complain and don’t pay it back. Own your debt it was your choice NO BAILOUTS!
The government didn’t bail out anyone who was paying his mortgage.
It’s all a question I guess of how one defines “bailout,” @ucbalumnus. By bailout I mean that people will not have to live with the consequences of their bad decisions. So, in that sense, most financial institutions and players were insulated from their apparent poor forecasting (with notable exceptions, of course) with regard to the housing fiasco, and (perhaps) most student loan borrower will also not have to suffer for their poor decisions. If I am right, the USG will need to absorb these losses, imposing them upon taxpayers explicitly to the extent it can, and then implicitly upon the public generally through inflation to the extent it must.
The problem is large. Last I checked, student loan debt - the overwhelming majority of which is held by the USG - now surpasses all other categories of personal debt. Over $1.5T. We’re talking about some real money here, ~50% larger than credit card debt. Mortgage debt, at ~$9-10T is of course larger, but that is at least secured. Student loan debt is secured by nothing. The problem has literally blown up in the last decade, with aggregate debt tripling since 2007.
While it is nice to think that people should own their own decisions, society at large favors bailouts at all levels. This article contains a few figures, but is more valuable for its tone: it, and others like it, serve the function of preparing the public for the inevitable bailouts by characterizing the problem as one that will inhibit the economy generally, rather than rewarding poor decisions: https://www.bloomberg.com/view/articles/2018-08-20/student-loans-are-starting-to-bite-the-economy.
I’ll reiterate my advice: to the extent one can delay repaying principal without excessive costs, one should. The most unhappy people in the housing after math were those who paid their bills on time, while others skated. Saw plenty of that myself!
I’m not seeing that. What the author shows is % of default by loan type. What the author does not show is % of total or $ total by loan type. In fact, the author (purposely?) conflates the numbers:
My point is that we need to parse that $9B (or $23b, or the 841k in default) before we have any idea on how to address the problem (or throw more money at it).
Some of it is that students and parents are allowed (and encouraged to by schools) to go out on the financial brink to attend the school. The students who have problems are likely the ones who ended up having to leave school before they got their degrees. It’s an awful position to be in to be carrying a level of debt that may be similar to someone who actually has a degree, but you do not have the credentials to get a job that will pay enough to make the payments. Many students and parents have magical thinking believing that the college or university will work miracles to make sure that a top student doesn’t have to drop out for their senior year. The fact is that they will NOT. If you don’t have enough to pay, you will have to leave. You are still on the hook for all the money you borrowed. It’s all due 6 months after you were asked to leave your college. No exceptions. You can ask for forbearance to give you time to pay, but all that does is add a TON more money to what you owe.
Parents and students need to understand all the facts before they start down a college journey and understand how they are going to come up with MORE money each year than what you may have been asked to give freshman year. Some colleges increase 5% per year, a few have had as much as 10% increases. If you can’t comfortably figure out how to pay for all four years - don’t go to that school! I lived this nightmare and would not wish it on anyone.
@emptynesteryet Some of the issue is the for profit schools, and lending to 17 and 18 year olds who don’t understand what they are getting into when they take on this debt. They aren’t old enough to drink or vote, but they can take on all sorts of debt that may be ill-conceived. They don’t get enough loan money to actually finish a degree, and then they can’t pay it back. It’s a pretty vicious cycle. Personally, I think there needs to be much more transparency given to the student in understanding whether or not they can actually finish school based on the money available to them when they start. If a four year college isn’t possible - the student should be told that.
And people are woefully naive when it comes to the work world. The same folks who can consult 5 different websites and read past reviews to figure out where to order a pizza, and wouldn’t dream of buying sun tan lotion without consulting the “experts” online, assume that a degree in travel or sports is the fast ticket to a lucrative and snazzy career working for Disney or ESPN. There are unscrupulous four year colleges happy to “sell” a kid the idea that you need a degree in legal studies to become a paralegal, or a degree in health management to work coding insurance claims. Parents and kids don’t bother to do their research- and then can’t fathom why they are having trouble paying back their loans on an entry level salary.
There is a large gym near my home (one of the big national chains) which is the “employer of last resort” for kids with degrees in sports management who can’t get a job which requires an actual four year degree. The kids are so frustrated- working the front desk (a job which require a HS diploma) trying to figure out where things went wrong. And they learn- belatedly- that most of the big time major leagues sports agents have law degrees (three more years of school) and that the folks running the large TV networks have MBA’s (two more years of school) and their loans are due any day now and why the hell did they rack up debt to hand out towels at a gym?
If I’d followed this ‘rule’ I wouldn’t have one college grad and one about to graduate. Definitely important to have a budget, definitely important to keep costs as long as possible, but there are no sure things and adjustments have to be made along the way.
I think they also need to accept that they can’t start at the top, that they might have to move from NYC to Kansas City to get a start and to be able to afford to live on their paychecks.
I have one kid who has a good new job but it is in a city where she wasn’t particularly looking to live. That’s her sacrifice. Niece did that same thing, and took a lower paying job, lives in a closet, has no car (walks to work and takes Ubers or rents one of the red bikes to go across town). Two years later she’s making a much higher salary and has settled into her new city. Still lives in the closet.
I have another kid who just wants to go back to working at Disney, which pays nothing. We were having a discussion about her having a car when she returns. Her friend has a car and works there. Well, her friend lives with her parents, and I’m sure the parents pay for the car and insurance too. Sure, the friend can afford to live on $12/hr because she isn’t supporting herself. When daughter lived there before, she lived in the Disney employee village, but she never had any money left over. Company town, so they gouge them for rent and fees. I asked her how she’ll pay for a car, a student loan, and health insurance. She’s quite sure she can do it. I’m quite sure she can’t.