There are currently more than 44 million borrowers owing approximately $1.6 trillion in student loan debt to banks and the government. In the United States alone, student loan debt is now the second highest consumer-debt category, behind only mortgage debt, making it greater than what’is owed on both credit cards and auto loans.
Student loans have seen cumulative growth of almost 157% over the last 11 years. By comparison, auto loan debt has grown 52%, while mortgage and credit-card debt fell by about 1%, according to a Bloomberg Global Data analysis of federal and private loans.
As of 2019, the average American borrower has approximately $33,000 in student loan debt. Millennials bear the brunt of this burden, with 75% of the generation born from 1980 to 1996 carrying some form of college debt. However, the impact of the ballooning debt affects every generation and level of social strata and has real consequences for the economy.
- Public Colleges: 66% of borrowers who graduated from public colleges have student loan debt. Average student loan debt at public colleges is $25,550, which is 25% higher today than it was in 2008.
- Private Nonprofit Colleges: 75% of borrowers who graduated from private nonprofit colleges have student loan debt. Average student loan debt at private nonprofit colleges is $32,300, which is 15% higher today than it was in 2008.
- For-Profit Colleges: 88% of borrowers who graduated from for-profit colleges have student loan debt. Average student loan debt at for-profit colleges is $39,950, which is 26% higher today than it was in 2008.
While much of the conversation about student loan debt has centered around millennials, it’s the baby boomers (born between 1946 and 1964) who have proportionally experienced a larger share of the nation’s ballooning student debt. Many boomers took out these loans for their children and grandchildren. Over the last five years, the largest increase in student loan debt on a percentage basis in the U.S. is among those ages 60 to 69, who have experienced a 72% increase in their student loan balances. More than 50% of boomers say that college debt is negatively impacting their ability to meet financial goals according to a white paper from the Guardian Life Insurance Company of America.
The cost of borrowing has also risen over the last two years. Undergraduates saw interest on direct subsidized and unsubsidized loans jump to 5% this year — the highest rate since 2009 — while students seeking graduate and professional degrees now face a 6.6% interest rate, according to the U.S. Department of Education. The federal government pays off interest on direct subsidized loans while borrowers remain students, or if they defer loans upon graduation, but it doesn’t cover interest payments on unsubsidized loans.
As young adults struggle to pay back their loans, they’re forced to make financial concessions that create a drag on the economy. Student debt has delayed household formation and led to a decline in homeownership. In a study released in January 2019, the Federal Reserve Bank of New York found that homeownership rates for people ages 24 to 32 decreased by almost 9 percentage points. Notably, the agency discovered that almost 20% of this decrease in homeownership was due to student loan debt. In fact, the Fed estimated that about 400,000 young Americans couldn’t purchase homes last quarter due to their educational debts. Sixteen percent of young workers aged 25 to 35 lived with their parents in 2017, up 4% from 10 years prior, according to Bloomberg Intelligence.
A 2015 study by economists at the Federal Reserve Bank of Philadelphia found “a significant and economically meaningful negative correlation” between rising student loan debt and falling formation of small businesses. Small businesses are responsible for approximately 60% of net employment activity in the United States. If you’re paying off a student loan, you’re less able to pull together the cash needed to start a business.
Debt and delinquency
Student loan debt currently has the highest 90+ day delinquency rate of all household debt. More than 1 in 10 borrowers is at least 90 days delinquent, while mortgages and auto loans have a 1.1% and 4% delinquency rate, respectively, according to Bloomberg Global Data. While mortgages and auto loans have experienced an overall decrease in delinquencies since 2010, student loan delinquency rates remain within a percentage point of their all-time high (11.8%) in 2012.
Student loan debt in the United States generally consists of two different types: federal loans and private loans.
The first federal student loans in the United States were offered in 1958 under the National Defense Education Act, and the program has grown significantly since that time. Federal student loans are backed by the U.S. government and their interest rates are controlled by Congress.
In contrast, private student loans are those provided by independent financial institutions. Their interest rates are typically higher than those of federal loans and repayment options are generally less flexible. Prior to 2010, private lenders provided the most student loans. However, the financial crisis of 2007-08 prompted the government to take significant regulatory action – and, as a result, the federal government now disburses around 90% of all student loans.
The National Center for Education Statistics (NCES) estimates that Ph.D. graduates outside the field of education owe an average $98,800 in student loans, in part because many Americans with doctorates also hold debt from earning previous degrees. NCES analyzed student loan balances of graduates from the 1999-2000 academic year to the 2015-16 academic year and found that average loan balances for those who earned their Ph.D. increased by 104%, from $48,400 to $98,800, and student loan balances for those who earned medical doctorates increased by 97% from $124,700 to $246,000 in constant 2016-2017 dollars.
Average debt among students who earned other non Ph.D. degrees increased by 105%, from $64,500 to $132,200. According to the Bureau of Labor Statistics (BLS), the average median weekly earnings for a person with a doctoral degree is $1,825, or about $94,900 per year. That’s compared to average median weekly earnings of $1,198, or about $62,296 a year, for bachelor’s degree holders and $730 a week, about $37,960 per year, for those with a high school diploma.
Few ways out
Student debt is special. Absent the most extreme circumstances, borrowers can’t declare bankruptcy and have their student loans forgiven, as with other debts. The threshold for relief is so high, and lawyers so expensive, that fewer than 1000 borrowers try to declare bankruptcy each year. For most loans, if borrowers don’t pay on time, the government can dip into wages, unemployment benefits, tax refunds, and even Social Security checks. Also, unlike mortgage borrowers, who can hand over their keys and walk away, student debtors can’t return their diplomas.
Like mortgages, student loans get pooled and repackaged into new financial products, also known as securities. The lenders then sell the securities to investors. Investors receive the reward of monthly loan payments, plus interest. They can hold the securities themselves, trade them, or bet on them. In turn, lenders receive quick cash, including fees and commissions, and push the risk of the underlying loans onto investors. This shift allows lenders to make more, and larger, loans.
In theory, more loans mean the securitization process benefits borrowers. But reality suggests otherwise. In student debt, borrowers shoulder most consequences of non-payment. As such, players in student loan asset-backed securities (SLABS) gain from an increasing supply of student debtors, who are saddled with the heavy burden of the inability to declare bankruptcy and have these loans forgiven. Overall, these constraints for borrowers make SLABS uniquely safe investments.
Conclusion: Everybody pays
Such large amounts of outstanding student loan debt borne by a generation which typically at this stage in life would be buying new homes, cars, and appliances will shift spending patterns somewhat by deferring those purchases or forgoing those purchases altogether. Though a typical undergraduate earning an average of $45,000 to $65,000 per year can afford to service a debt load of $25,000 to $32,000 amortized over 10 years, the funds required to service that debt will be competing against the purchases of homes, cars, and appliances. This cannot help but have some economic impact.
Though there is a lot of data available about the student borrowers of student loans, what most people don’t realize is that there is an expected family contribution in a typical FAFSA loan application. That expected contribution is typically made by parents or grandparents. If the funds are not available, those funds can also be borrowed by parents or grandparents. This debt amount does not show as student debt, but as parent or grandparent debt. That debt also comes at a price to society as well, limiting the financial planning and retirement savings of the older (and oldest) generation.
The evidence suggests that the recent growth in lending to students of for-profit schools will impact spending as well.
For-profit schools have a much higher default rate than nonprofit schools and state schools. Trade schools are one category which can be analyzed by objective graduation rates, likely earnings, and investment returns on tuition; however, in the case of for-profit schools with traditional non-vocational educational programs, it is much more difficult to evaluate the rate of return for a college degree. This is in large part due to a lower overall graduation rate in these schools and the type of students they tend to attract.
The Trump administration has chosen to reverse course from the Obama administration and, rather than restrict the loans available to for-profit schools with high default rates, they have chosen to reopen these lending programs to for-profit schools again. Unless graduation rates and earnings are factored into the equation, loans from these institutions may serve to exacerbate the explosive growth in student loans and make matters worse for the many students dropping out; students who drop out still bear the burden of high debt loads, but lack the advanced degree to pursue the employment that would help them repay these loans.
The securitization of student loans from public, private, and for-profit schools makes the proposal put forth by some Democratic politicians of forgiving student loan debt a difficult one. The student loan debt market is massive, and each debt holder would have to be satisfied to retire the debt. In addition, there is the fallout from any potential litigation by those who previously paid off student loans to consider.
These issues are not enough alone to drive us into a recession; however, the alarming growth in student loan debt should concern everyone longer term.
If you have any questions or comments on student loans, please contact us at 610-793-1001 and we would be happy to help you find the answers.
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