As Wall Street and US President Donald Trump tout the news of a booming stock market and low unemployment, students can be quick to roll their eyes. The improving economy has yet to mean higher wages for graduates who are already struggling to pay off massive debt, not to mention easing the minds of students who are watching the barrel of loan bonds. six digits ahead.
Federal student loans are the only segment of consumer debt with continued cumulative growth since the Great Recession. As tuition and borrowing costs continue to rise, the result is a growing default crisis that even Fed Chairman Jerome Powell has called a cause for concern.
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Student loans have grown cumulatively by almost 157 percent over the past 11 years. By comparison, auto loan debt rose 52%, while mortgage and credit card debt actually fell by about 1%, according to a Bloomberg Global Data analysis of federal loans. In total, there is a whopping $ 1.5 trillion in student loans (through the second quarter of 2018), marking the second largest segment of consumer debt in the country after mortgages, according to the Federal Reserve. . And the number keeps growing.
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Student loans are being issued at unprecedented rates as more and more American students pursue higher education. But tuition fees at private and public institutions are reaching all-time highs while interest rates on student loans are also rising. Students spend more time working than studying. (About 85 percent of current students are now in paid employment while enrolled.) Experts and analysts fear the next generation of graduates may default on their loans at even higher rates than in the aftermath of the financial crisis. .
“Students aren’t just facing rising college tuition fees; they face increasing borrowing costs to afford that degree, ”said John Hupalo, founder and CEO of Invite Education, an educational financial planner. “This double whammy does not bode well for students who are repaying their loans.”
Federal student loan debt currently has the highest 90-day default rate of all household debt. More than one in 10 borrowers are at least 90 days late, while mortgages and auto loans have late rates of 1.1% and 4%, respectively, according to Bloomberg Global Data. While mortgages and auto loans have seen an overall decline in defaults since 2010, student loan default rates remain at one percentage point from their record highs of 2012.
Defaults intensified in the wake of the Great Recession as for-profit colleges presented themselves as a solution to low-paying jobs, said Judith Scott-Clayton, associate professor of economics and education at the ‘Columbia University. But many of those degrees ultimately turned out to be useless, leaving graduates with debts they couldn’t pay off.
Students attending for-profit universities and community colleges accounted for almost half of all borrowers leaving school and starting to repay their loans in 2011. They also accounted for 70% of all defaults. As a result, delinquencies skyrocketed during the 2011-2012 academic year, reaching 11.73 percent.
Today, the student loan default rate remains almost as high, which Scott-Clayton attributes to social and institutional factors rather than average debt levels. “Delinquency is at crisis levels for borrowers, especially borrowers of color, borrowers who have turned to a for-profit organization, and borrowers who ultimately did not graduate,” he said. she said, noting that each cohort is more likely to miss repayments on their loans than other public and private college students.
The people most at risk of delinquency tend to be, counterintuitively, those who have taken on less debt, said Kali McFadden, senior research analyst at LendingTree. Graduates who leave school with six-figure degrees that are appreciated in the market, such as postgraduate degrees in law or medicine, generally see a good return on their investment.
Hupalo agreed. “There is a systemic problem in the student loan market that does not exist in other asset classes,” he said. “Students need to find a job that allows them to pay off their debt. The delinquency rate will increase as long as students do not obtain diplomas that reimburse this cost. Additionally, while college dropouts and for-profit graduates often struggle to find jobs with wages high enough to pay for their education, minority graduates are more likely to face discrimination in labor markets. work, which makes matters worse.
The cost of borrowing has also increased over the past two years. Undergraduates have seen interest on subsidized and unsubsidized direct loans soar to 5% this year, the highest rate since 2009, while students seeking graduate and professional degrees are now faced with at an interest rate of 6.6%, according to the US Department of Education. (The federal government reimburses interest on direct subsidized loans as long as a borrower remains a student or defers loans after graduation, but does not cover interest payments on unsubsidized loans).
“If you’re in an interest-based plan you see costs go up, which worries me for students who are in school and have seen their debt increase before they’ve even finished,” Scott said. -Clayton. She said borrowers with lower amounts of debt, those most at risk of default, should take advantage of income-based repayment plans if they can.
The worsening student debt crisis is not just bad news for students and recent graduates. The accompanying defaults can have a significant negative impact on the economy as a whole, the Fed chairman told Congress earlier this year.
“You may see long-term negative effects on people who cannot repay their student loans. It hurts their credit rating, it affects half of their economic life, ”Powell told the Senate Banking Committee in March. “As this continues and student loans keep growing and getting bigger and bigger, it could absolutely dampen growth.”
“Students shouldn’t assume that their loan manager has their best interests in mind. “
As young adults struggle to repay their loans, they are forced to make financial concessions that hold back the economy. Student debt has delayed the formation of households and led to a decline in the number of homeowners. Sixteen percent of young workers aged 25 to 35 lived with their parents in 2017, up 4 percent from 10 years earlier, according to Bloomberg Intelligence.
“You have a whole generation of people who have a large amount of student loans and its crimping demand for other goods and services,” said Ira Jersey, chief US interest rate strategist for Bloomberg Intelligence . “As people live with their parents or cohabit with a non-partner, millions of houses and apartments are not bought. Wi-Fi or that extra couch isn’t either. We believe this has a significant impact on the economy.
Yet Jersey doesn’t think the student debt crisis is as bad as the subprime meltdown a decade ago. “It’s very different from mortgages,” Jersey said. “While this is a crisis in that it increases the deficit and taxpayers have to pay more over time, it does not present a systemic risk to the financial sector like mortgages in 2007. “
However, that doesn’t offer much solace to students, six in 10 of whom say they frequently worry about their debt, according to a report by Chegg, an education technology company. To allay fears of delinquency, Scott-Clayton said students should be proactive in finding different repayment plans.
“We have to ask ourselves if the lack of transparency that surrounds [student] the loans are intentional, ”she said. “Students shouldn’t assume that their loan manager has their best interests in mind. “
Learn more about the student debt crisis: