The editors of the Wall Street Journal take note of the discrepancy between what was anticipated and what has actually happened with student loans over the years:
Defaults have fallen for most forms of consumer debt as the economic expansion continues. Mortgage delinquencies last quarter hit a historic low. But severely delinquent student loans have soared since 2012 and are now 35% of “severe derogatoriesâ€â€”more than credit cards (23%), auto loans (21%) and mortgages (11%).
About 10% of the $1.5 trillion federal student-loan portfolio is 30 days or more past due. Another 20% is in deferment or forbearance, and about 30% is in income-based repayment plans that allow most borrowers to cap monthly payments at 10% of discretionary income and discharge the remaining balance after 20 years or 10 for folks in “public service.â€
Note that the effective expansion of the loan program was not written into the legislation. It was created by executive action.
The inability of recent graduates to repay their loans is not tremendously surprising. Underemployment, i.e. a job that pays a lot less than would be expected for a college grad, is widespread and persistent among today’s college grads.
The discrepancy has budgetary implications:
Many borrowers in income-based repayment plans aren’t repaying principal, so their balances are growing as they accrue more interest. By 2012 a majority of new borrowers had bigger balances after two years of making payments.
Yet during the Obama years CBO scored student loans as a government profit center by underestimating the growth in income-based repayment plans. CBO has slowly scaled back its 10-year revenue projections for student loans to a $31.4 billion government cost in this year’s forecast from a $219 billion 10-year revenue gain in 2012.
The nearby chart tells the story. Using fair-market accounting that prevails in the private economy, CBO now projects a $306.7 billion cost to taxpayers over the next 10 years. The red ink will be far worse beyond that 10-year budget window.
Another non-surprise: The government is spending more to administer student loans than the Obama crowd forecast. In 2010 the government spent $800 million on “administrative costs,†which CBO projected would increase to $1.2 billion in 2019. The government’s overhead tab this year was $2.9 billion.
This entire student loan arrangement is a scam; it’s a racket:
Income-based repayment plans have also encouraged schools to raise prices and enroll students who probably won’t earn enough to pay off their loans. Someone with a master’s degree in dance from New York University shoulders on average $96,000 in debt, according to government data. Imagine if the government created income-based repayment plans for mortgages.
Capping student-loan monthly payments has also enabled more borrowing since most lenders review a customer’s total monthly debt payments when underwriting loans. Americans who borrow more than they can repay typically default first on student loans. Cars and homes can be repossessed if borrowers don’t make payments. Past-due credit card bills incur late fees and hefty interest payments. Borrowers who default on student loans, on the other hand, are encouraged by loan servicers to enroll in income-based repayment plans.
The results make it clear that some serious reform is necessary in our system of higher education and how we finance it. Federal loan programs should be much more tightly tailored to help people pursue gainful employment in the private sector. A tax dollar to higher education to underemployment or government employment is a vicious circle that will inevitably fail.
” income-based repayment plans.”
I was not aware of those, so there is a path forward for drowning borrowers. Good. It’s all fiat money anyway.
We could certainly start by not giving students loans to schools where graduates are unable to repay loans. Have schools publish both graduation rates and loan repayment rates. Set a threshold and no loans to schools that are above that threshold. (This will adversely affect for profit schools so will be opposed by DeVos and company, but it is the low hanging fruit approach.)
Steve
Make colleges and universities guarantee their student loans. After all, it is the schools that end up with the money. If the schools faced the possibility of having to repay the loans, they would be incentivized to limit cost increases, end administrative bloat, and encourage student borrowers to pursue majors that have a realistic chance of resulting in gainful employment.
“Mortgage delinquencies last quarter hit a historic low.â€
I guess banks suddenly became benevolent, and quit lying, or quit kidnapping people until they signed the loan.
Maybe it’s early results from the new-found commitment to stakeholders proclaimed by the members of the Business Roundtable.
The reason I haven’t posted on that is that at this point it’s just words. I’ll believe it when I see it. My first assessment is two words: moral hazard.
“a master’s degree in dance from New York University shoulders on average $96,000 in debt”
The WSJ is clearly picking an outlier, the average student loan debt upon graduation is $29,800, from private and public loans. The median debt appears to be around $17,000, reflecting the fact that 31% of graduates don’t take out any student loans. The federal government lends no more than $31,000 in loans for an undergrad degree, but typically less if the student graduates in four years. So unless there is some trick that I’m not aware of, a good chunk of that dance master’s student loan debt is from private student loan providers which the WSJ ignores.
On average, 24% of the cost of college is paid by borrowing, either by the parents or the student, so I’m not convinced that that public loans are major cost drivers. It does seem like there are some extreme debts being taken in graduate school, but they are not necessarily common. And there are people, possibly trying to work while going to school, who have their education interupted or need an extra year or so to complete a degree (for which they pay a premium). It may be possible that the federal government should loan more to squeeze out some of the private loans.
(*) If it takes more than four years, loans still cap at $31,000.
I’m honestly not sure what they’re measuring there. Do they mean four years of undergraduate plus two years for the masters? Do they mean just the two years for the masters?
I thought it meant total student loans upon graduating with a master’s degree, including costs of the undergrad degree. For federal student loan purposes, the obligation to pay the loan is tolled until six months after the student stops being a full-time student. It’s at that point the total amount of the debt is tabulated and the payment plan is supposed to be entered.
Federal student loans are capped at an average of $6,750 per year for undergrads (with an aggregate cap of $31,000), and capped at $20,500 per year for graduate students (with an aggregate cap of $138,000 for both undergrad and grad loans). So its reasonable to assume that the average graduate with a master’s in dance at NYU would have had $68,000 in federal student loans across both undergrad and grad, $28,000 in private student loans with higher interest rates, poorer deferment terms, and a requirement of a parent to co-sign the loans. That would cover about half of the tuition, not including room and board for 6 years at NYU dance.
So I guess wouldn’t say federal backed student loans have no effect on cost; any loans make it easier to purchase goods and services and expand demand. But it seems like students are expected to pay a lot of the freight themselves; it’s not comparable with healthcare for example where insurance immunizes much of the desire for patients to rationalize costs. What if Fannie Mae only subsidized mortgages for the equivalent of 24% of the value of a home? I think the cost of housing would be far less today, but also the value of the housing would probably more closely resemble Albania’s.
“I guess banks suddenly became benevolent, and quit lying, or quit kidnapping people until they signed the loan.”
If you force banks to make sure that borrowers can actually pay back their loans and dont hand out 125% mortgages you get a lot fewer defaults. Who would have guessed? (Not the bankers apparently.)
Steve
There are several conditions, but for independent students the caps are $57,500 (undergraduate total) and $138,500 (graduate + undergraduate).
Like mortgages, traditional banks are not the primary lenders.
I suspect the primary lenders are similar to the mortgage companies of the early 2000’s. I have no doubt there are ‘liar’s loans’, and our local expert should get on the case. He can sniff out a liar making a loan from a mile away.