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Friday, October 28, 2016

By Benjamin Landy

Policy Associate, The Century Foundation

By nearly every measure, American households have made significant progress repairing their balance sheets in the four years since the Great Recession. Total credit card debt has fallen $187 billion, stabilizing at late-2006 levels, and mortgage debt is still dropping, down over $1.2 trillion since 2008. Consumers are getting better at paying their bills on time, too: the number of delinquent borrowers behind on their payments by 90 or more days has fallen substantially in almost every credit category.

Student loans remain the glaring exception, soaring to $966 billion last quarter as college costs—and applications—continued to rise unabated. That’s nearly triple the debt that students held in 2004, thanks to a 70 percent increase in the number of borrowers and an average loan balance among indebted graduates that passed $26,600 in 2011.

Student debt would not be such a problem if borrowers were finding jobs and paying their bills. But the number of former students behind on their payments has increased substantially in the past year, even as other consumers have been finding their economic footing. According to the Federal Reserve Board of New York, the share of student loan balances 90 or more days delinquent surged to 11.7 percent in the last two quarters—three percentage points higher than the same time last year—elevating student loans, for the first time, to the ignominious distinction of having a worse repayment rate than credit cards.

Yet even that figure underestimates the severity of the delinquency crisis. Among borrowers who have already entered repayment—excluding those in their post-graduation grace period, or in deferral or forbearance for economic reasons—the delinquency rate is roughly twice as high.

It’s hard to know what to make of this unexpected downturn among college graduates.

The first impulse is to blame the economy—specifically high unemployment—for borrowers’ sudden inability to manage their debts. But the unemployment rate for people over age 25 with a bachelor’s degree or higher was just 4.2 percent last month, far below the 9.2 percent rate for those with only a high-school education. And while the numbers are less clear for recent graduates (one widely circulated story reported half are jobless or underemployed, but did not differentiate between the two), there is nothing to suggest that their job prospects worsened considerably in the last year as the broader economy recovered.

Mark Kantrowitz, publisher of and an expert on student loans, told me he thinks the beleaguered college graduate narrative is overplayed. “When you look at the data and you see unemployment rates for those with bachelor’s degrees or associate’s degrees, they’re much lower than the figures pushed by people who are trying to claim that there is a bubble,” Kantrowitz says. “A lot of people seem to have a vested interest in [that story], so they either misinterpret the data because they aren’t familiar with it or they deliberately mischaracterize the data to push their point.”

At the same time, he admits, default rates tend to be a lagging indicator of unemployment. The ability to apply for an economic hardship deferment or forbearance means an unexpected job loss may not turn up in the delinquency data for months or even years after the borrower begins to struggle.

As a result, the recent delinquency trend may be driven by borrowers who graduated or entered the job market at the height of the recession and have now reached the end of the maximum three-year deferral period allowed under the federal loan program. The large spike in delinquencies in the second half of 2012 appears to support this theory, as large numbers of students who left school in 2008 and 2009 would have had to enter repayment this year. If that were the case, we might expect delinquency rates to get worse before they get better.

student loan chart

Kantrowitz thinks there is more to it than that. He suggests that the delinquency data are distorted in part by an unintended loophole that allowed borrowers before 2006 to consolidate federal student loans while still in college, locking in lower in-school interest rates. The early repayment status loophole was closed by the Higher Education Reconciliation Act of 2005, but not before the savviest borrowers entered early repayment at the lower rate.

“Every 1 percent increase on the interest rate on a federal student loan is, on average, a 5 percent increase on the monthly payment of a 10-year term, and 9 percent on a 20-year term.” Fast-forward a few years, and the remaining borrowers from the 2005-2006 cohort who weren’t paying attention to the loophole opportunity are now the most likely to be in default.

Still, seven years have passed since the Department of Education closed the loophole, and unsubsidized federal interest rates have been locked at 6.8 percent since 2010. Even if the early repayment status loophole caused some of the increase in the delinquency rate, its effect should be largely dissipated at this point.

Perhaps indebted college students have simply reached a breaking point, as the combination of rising college tuition, growing loan burdens, underemployment and falling wages becomes unsustainable – call it student financial fatigue.

According to a recent TransUnion study, more than half of student loan accounts are in deferred status, as more borrowers attempt to avoid their loan balances until the economy improves or they are forced into repayment. Some return to school for a graduate degree, amassing more debt in exchange for a competitive advantage in the job market, while others manage their debts by retreating from the middle class consumer economy—delaying homeownership, marriage and children until their loans are paid.

But if the souring delinquency data are any indication, none of these strategies are working particularly well. Until policymakers find a way to address the underlying problem of soaring college costs, or design a better structure for the federal loan program, the bills will keep coming.

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  • Black Coffee

    There’s an easy solution to the problem of soaring college costs. Stop exempting student loans from bankruptcy. If student loan debt were like any other debt, colleges would be less likely to hand out the loans, and when enrollments drop off significantly, they’ll lower their tuitions to compensate. I find it very difficult to believe that the actual cost of college has increased as much as tuitions have, when tuitions have so grossly outpaced the rate of inflation. Tuitions have been allowed to get out of hand because it’s a debt students can’t get away from. The money is basically guaranteed. If that ends, you’ll see tuitions fall, making the loans more reasonable and thus easier to repay.

  • mewcomm

    “Student Financial Fatigue”! I love it! Though I’d call it, “Reckless and irresponsible kids” . The “loser” generation. Here’s a snap shot of their world view.

    Some people have debt. Debt is a curse, a problem. Debt is bad. Debt is something that happens to people that is not their fault. It is better to not be in debt. No one deserves to be in debt. In fact, it is not fair that some people are in debt. People are entitled to be debt free. People who are not in debt must be taking advantage of something or someone that is not available to or is hidden from or is denied those who are in debt. We must free people from the bondage of debt. The bondage of debt is foisted on those in debt by those who are not in debt………..

    These Kids bought into the idea that they could borrow money with no consequences. Now they will receive what they deserve.

    • Amerian kids, with limited financial resources and no wealthy parents or grandparents to help them, borrowed money to pursue a college education because that was the only option available, other than trying to make ends meet doing menial work throughout their lives.
      Yes, there are consequences to out decisions, but there are also consequences to a society that fails to accept one of its most important obligations: ensuring our children can have a better future than we did and doing everything we can to ensure a bright future for our country.
      The last thing we need, at a time when we have to issue thousands of H1b visas every year to entice foreign professionals to come to the USA to satisfy demand, is to deny our children the opportunities that are available to children in Europe, Asia, Canada, Australia and just about every industrial nation in the world. Our children are our future, erecting barriers to prevent them from getting the education to meet the challenges of the 21st is not the way to go.

      • mewcomm

        So let me get this right Dominick. ” The last thing we need” is to issue H1B visas for educated foreign workers. But it’s ok to permit the entry of millions of uneducated foreigners?

      • sigrid28

        Is it possible that the need for H1b visas is not a shortage of American workers to fill positions requiring expertise but the desire to fill these positions at wages as low as possible? I have always found it odd to think that among the millions of U.S. citizens who are college gradates there is none to fill jobs that foreign workers are brought in to fill. Are American businesses and institutions once again trying to game the system in order to pay as little as possible, as they do when they cut full-time jobs with benefits down to part-time without benefits, or hire the least well-qualified worker rather than the experienced worker to save money? It borders on the destructive practice of moving entire business enterprises overseas to hire the lowest paid workers possible. Which of the seven deadly sins stands behind this injustice? GREED.

        What are we to think about the unfairness of the debt college students carry when colleges and universities across the board run things in such a way that 60% of classes are taught by adjunct professors paid below minimum wage without benefits while tuition rates are skyrocketing? While administrators and tenured faculty are to blame, the hidden villains in this hoax are the trustees of colleges and universities who are the same moneyed class that promulgate the unfairness of business and corporations that pay a little as possible for labor and reward CEOs with million-dollar salaries and bonuses. Which of the seven deadly sins stands behind this injustice? GREED.

        • mewcomm

          I’ve been an adjunct. (4 years) They didn’t pay me much. No one forced me to take the job. I enjoyed it. My students (graduate level) did as well. My student reviews were very high. (emphasis on “very”)
          This discussion is a hoot! We’ve got victims, a revolutionary, an academic, and a hostile tone of resentment towards the elites that brought us this state of affairs.

          Cheers from Los Angeles!

          • sigrid28

            Welcome to this National Memo comment thread. While I don’t blame you for working as an adjunct, and commend you for doing so well at it, unless you belong to the moneyed elites and don’t need your income, you must admit that you should probably be paid more, have decent benefits, an office in which to see students, a top-of-the-line computer account with which to meet their needs and help them make deadlines, and a role in institutional governance; which is to say, you would welcome participating in the college or university where you work as a faculty member. If being an adjunct suits you, can you understand how other adjuncts may not be well suited to this endeavor. Alternatively, are they more things you would do for your students if you were a tenured or tenure-track faculty member?

          • mewcomm

            All right Sigrid…..All right. The relentless reasoning and calm of your missive has much merit!
            To be fair, I was an adjunct for 4 years. It was offered to me after a guest speaking event. I did it because I enjoyed the subject matter and the stimulating environment. It was all about me. Did I make a difference in any of the student’s professional lives or intellectual development? Perhaps. I am a working professional, didn’t need the income, have corporate style benefits and participation in the affairs of the university were not/ are not important to me. — I was the ideal “adjunct” from the University’s point of view. Just teach the class and take the small compensation we offer and try to do a good job please. I fulfilled their wish. —- All of your questions important and yes, I would like to have done more for students.

    • My grandson is a bright, energetic student at a fine state school. After adding up all the scholarships, work study, and family contribution, he still has a shortfall of $8,000 for each year. His father requested that i co-sign a Sallie Mae loan, since he had already stretched as far as he could. When I received the papers for the loan, I was shocked to learn that the minimum pay-back for the $8,000 was just under 16,000. This at a time when interest is at an all-time low!! There was also a disclaimer stating that the interest could go up, and there was no maximum. I can see how many young people, not knowing better, or having no other choice, can get sucked into massive debt by the time they graduate. When I went to school, my local credit union charged 7% interest for a guaranteed student loan. My sons received direct student loans at 3%. Sallie Mae warned in small print that the rate could rise above 25%!! I took a part of my retirement funds and lent it to my grandson at 1%, which is more than my bank is paying right now. Thousands of grandparents have no savings to offer, and the children know it, so the hopelessness of it all saps their ambition.

      • mewcomm

        Lola…..Did some one put a gun to your head and force you to sign? You voluntarily entered an agreement with a financial institution. End of story. Now get busy and start it paying back.

        • tcburch

          mewcomm…you would do well to actually comprehend Lola’s post. Your snarky reply indicates that you do not.

          • mewcomm

            Lola’s post is that of the Victim. The complainer. The “entitlement” crowd. These are the people “snark” was invented for. Because concepts like “personal responsibility” and “self reliance” are alien to them. Indeed I cannot imagine a group of people more deserving of “snark”. (tacky and fitting.)

        • karinursula

          maybe you should read Lola’s mail.She did not sign you Idiot, she lend the money her grandson.

          • mewcomm

            Thank You for the correction Karinursula. The whiney tone and victim wail of Lola’s post clouded my vision. Oh the injustice of these student loans! The Horror! Laughs. This crowd amuses me!

          • mah101

            mewcomm, can you tell the difference between a structural problem that demands understand and remediation and whiny victimhood? You certainly sound like an uncaring, uncompassionate, and uncomprehending oaf. I’m sure you are interested in solving problems, so the first step is understanding them.

          • mewcomm

            Actually I’m not interested in solving this problem mah. I’m interested in Americans not looking to government as the solution. Further, we are a nation where eduational achievment is not valued. (Do I really need to cite the K-12 stats from here in Los Angeles for you? Probably not). And those that do value it are skewered by the anti-intellectuals that are so pervasive. (See NY Times piece earlier this year where Asians dominate entry to elite schools.)
            Still, I would offer a partial solution. Bring back “debtor prisons” to discourage payment deliquency. That should be a part of any comprehensive solution.
            Thanks for the advice. Cheers from LA.

          • sigrid28

            No. You do not need “to cite the K-12 stats.” We do not have “eduational achievment” or even “educational achievement,” because (1) anti-intellectualism places no value on it–as you say, and (2) careless know-it-alls like you are teaching college graduate students as adjuncts (for low pay and no benefits) and you cannot see the problem with that. As for debtors’ prisons, I recommend a book you should have read already but if not, will highly enjoy: “Little Dorritt” by Charles Dickens. Cheers from nineteenth century London.

          • mewcomm

            Sigrid…. Excellent. Witty, Sharp, biting. My compliments! And I will read “Little Dorritt” . Cheers from the USA where there are so many “victims” of an uncaring society one cannot begin to count them all….. students, single moms, veterans, the elderly, the poor, the disabled, the illiterate, the young thugs of the inner city, drug users, the uninsured………………

          • sigrid28

            We can all do with less patronization. Look at groups you list, and answer this: members of which group would NOT have a better chance at finding work by completing a college degree?

          • mewcomm

            That’s an easy answer. Single Moms of course. The all time Champions of the “Victims” movement.

          • sigrid28

            Many single mothers have college degrees and jobs, and more would join that group if they could find adequate childcare and scholarship support. What about single mothers with disabled children? Are they just whiners, too?

          • mewcomm

            No, even in my brave new world of personal responsibility and self respect, we’ll have to make a few very minor exceptions. (Just as means testing will surely soon arrive, we would test for the severity of alleged disability before opening the government money spigot) Tsk Tsk, Sigrid…..first Professor Mah suggests I am a “free market anarchist” and now you try to get in the compassion back door. The hand wringing for the Victims in the USA is a 24/7 job.

          • sigrid28

            Less hand wringing and more investigating is my prescription, and for you, dear would-be comrade, self questioning when it comes to received notions. Just contemplate one example. For your information, persons with disabilities already get means tested to a fare-the-well, ditto for establishing a correct diagnosis and and prognosis. Often this takes place at a very early age, and then schools K-12 apply their own means testing and tests of eligibility. Afterwards, those without physical disabilities yet still disabled get kicked to the curb, where they then sometimes pick up assault weapons and take out their aggressions and disappointments on schoolchildren or moviegoers or a member of Congress meeting with constituents at a shopping center. Whose whining now?

          • mewcomm

            Excellent Sigrid….. you’re getting worked up now. Glad to hear they are means testing early. Better to catch these benefit extortionists early. The Veterans administration would do well to learn from the schools, as the threshold for “PTSD” has now been lowered to the point that a mere headache may qualify. Some 43% of Iraq/Af/Pak Vets are applying for “PTSD” benefits (Sources: A bunch). Fraud is surely rampant. And the vast majority of these Vets were not combatants.
            All right it’s been fun. Enjoyed the banter. I was off today and will not be able to engage with you tomorrow and others of your 24/7 “oh the injustices of the USA, club”.— I want you to rethink your opposition to debtor prison. A dose of “hard time” might do some of these kids some good.

          • sigrid28

            Try for a little more accuracy. I did not say I was against debtors’ prison. I suggested you read “Little Dorritt” by Charles Dickens to learn more about it. Two different things.

            But I do think that one definition of “hard time” for students would be having you for a teacher.

          • mah101

            Well in that case I’ll agree to disagree with you, mewcomm. I am interested in finding solutions, but I don’t feel that debtor prisons are a part of that solution. However, I will agree with you wholeheartedly that we are a nation that does not value educational achievement, and that contains a strong anti-intellectual element. Those are part of the context for the problem.

    • Actually, mewcomm, It sounds like you’ve sent a snapshot of YOUR world view., or what you assume is someone else’s. You’ve not walked in their shoes.

    • mah101

      In disclosure, I am a professor. I work with these kids everyday. They are not losers, or overly financially reckless. They are struggling to pay the costs of an education system that have been handed down through decreasing state funding of schools and increased demands by state legislatures for enrollments to allocate the few dollars left.

      We as a society have decided (apparently) that funding higher education is not something that is shared as a social good. Do not blame the students who are trying to gain access to a shrinking middle class lifestyle for the burdens we have imposed on them.

      This is not a matter for disagreement. We have shifted the financial burden of higher education from the taxpayers of the state to the students. Don’t blame them.

      • mewcomm

        Proffessor….I have taught as an adjunct at a large US university. (Graduate students– I won’t enter an undergraduate classroom) I take your point that they are “struggling”, yet many made what I consider “reckless” decisions to go deep into debt (some pursuing degrees of little value). These students and their parents (and apparently grandparents) have chosen this path. In my view, they have ignored the harsh economic consequences of their actions. And yes, I would characterize many of these students as “losers”. For numerous reasons. Those that graduate will be saddled with debt for decades. And increasingly only a graduate level degree will do for many fields (and yet that is no guarantee of success as you know.) The globalized information society in a post industrial state is the world we live in.
        Go right ahead and “try to gain access to a shrinking middle class”. But do so with awareness of the consequences. The USA has created government programs to assist in paying for college, to make mortgages easier to obtain, to assure “equality” across a range of activities. And when they fail (as many gov’t initiatives do), we are said to have “imposed burdens” on our citizenry.
        Thankfully Life is unfair. As it should be.

        • mah101

          Three points to consider, mewcomm. First, graduate education is very different than undergraduate. I tell my undergraduates who are looking for graduate programs to not go anywhere that doesn’t offer them funding. There are opportunities to gain a graduate education while being funded to go to school that are simply unavailable to the majority of undergraduates.

          Second, I doubt that you, or any other single individual, can accurately define the value of any particular degree. You may (as is often done these days) reduce it to a metric of future earning potential. However, great nations are not made great solely by the number of finance or marketing jobs they have. All of the fields contribute to society. They all have “value” but not all can, or should, be reduced to money. Again, our hypothetical great nation provides opportunities for all to contribute with their strengths, interests, abilities, and passions. To reduce that to a metric of “earning potential” is quite shortsighted and actually harmful.

          Finally, I think that if you actually examine the issue without bias or preconception, you will find that most government programs actually DO work. I believe we long ago determined that some form of government was actually GOOD for society. Are you advocating for an unregulated “free market” anarchy? I really don’t think you’d like that too much if you actually got it.

          Best to you from my lofty ivory tower (ok, it’s not very lofty, and its actually brick, and there is no ivy in sight, and I have a ton of papers to grade, but the mental image is still attractive…)

          • mewcomm

            Ok Professor…

            I’l take your sincere points. but I will point at a few of the failures of Gov’t. The US Postal System. Medicare. Veterans Administration. The “War on Drugs” consortium. Headstart (I know it drives liberals crazy that this myth has been exposed. 2 years out from participation in Head start there is no meaningful diff between kids who were in headstart and those who were not). — Why is it to point out the failures of government (at least on a macro level) is to be an advocate of “free market anarchy”? I think much of gov’t is excessive. But I also recognize it’s need and value.

            Yes, I accept that degrees all have “value” but not all can, or should, be reduced to money.

  • The solution to this problem is to provide free – means tested – college education to outstanding students who can pass a stringent qualification test before admission. Ensuring future generations of Americans get the education they need to compete against their European and Asia counterparts ought to be one of our top priorities. Our future depends on them.

    • whodatbob

      State Universities are public schools, should be made avaliable to all in State residents who meet entrence requirements at no cost except housing. That as it was in my home state 50 years ago. Room and board was $350 a semester. Todays cost at that State University is over $7,500 a semester including $2,000 room and board.

      • mah101

        If State Universities are public schools, they should be receiving public funds. Check your former school’s appropriation right now and see what percentage of their budget is from state allocations – you might be surprised to see the figure in single digits.

        States have SLASHED funding of public universities over the past 8 to 10 years. At the same time, they demand metrics of achievement and priorities from those same schools that tend to favor increasing numbers of students and infrastructure investments. So who is to pay for these costs if not the states? It falls on the students…

        You simply CAN’T have declining numbers of students without imposing even more declines on the State allocation, yet the states have already cut their funding to these schools to the point that it is actually somewhat absurd to even call them state universities, all the while demanding increasing student enrollments and graduation rates.

        Student loan debt is complicated, but to not discuss the role of state funding (or lack thereof) and it’s contribution to the financial debt imposed on students is to ignore the elephant in the room.

        And why is it so hard to meet a four year graduation timeframe? Why is it so hard to keep students in school? A primary cause is that they are working outside school to be able to afford to attend.

        Great nations emphasize education. Great nations demand that education be a priority for national growth and development. Yet we SLASH our funding for higher education.

        • whodatbob

          My point 100% funding was the norm but but elected officials continue to cut funding for higher education. Your expansion of my short post makes excellent points. Thank you for your insighhtful response.

          • mah101

            You’re welcome, but I wish none of us had to make these points. Our students and kids deserve better.

    • angelsinca

      The solution is already in place for ‘outstanding students’. It’s called scholarship.

  • When rich people like Donald Trump use bankruptcy 5 times to get rid of debt, why should the rest of us care about debt if he doesn’t need to

  • S-3

    This is one more thing only violent revolt/anarchy can resolve at this point… I hope I don’t need to go into why!

    • mewcomm

      S-3…while the old “Marxist” in me glows at your words….they are laughable. American kids don’t serve their nation and the only “violent revolt/anarchy” they know is either video games or inner city chaos. Hardly Trotskyite models of Discipline! I wish you well!

  • mewcomm

    Sigrid, You’re too fun. Too smart. Too articulate. Can I subscribe to you? Laughs!