According to Credit Suisse’s US Economics Digest report dated July 5, 2012 by Neal Soss and Dana Saporta, the amount of student loans has increased enormously in the last few years, reaching almost $1 trillion at the end of Q1 2012. It has become the second largest form of consumer debt, behind mortgages, overtaking credit card loans and auto loans.
Federal loans now make up almost 88% of the total student loans, whereas institutional, private and state loans make up the other 12%.
Causes of Increase
Tuition hikes have been rising at a rate faster than the CPI and hence when the college expenditure is rising at a fast rate, household income is not rising proportionately. As a result it is becoming increasingly difficult for households to pay for college out of their own pockets.
Another important fact stated by Credit Suisse is that there has been an increase in the enrollment growth.
As a result of the weak labor market since the Great Recession, as job openings have become harder to find, more and more high school graduates and college graduates are choosing to continue their education ‒ expanding enrollment even further. Consequently, a greater number of students are relying on student loans to pay for college.
Student lending has become a profitable venture for the government. The Department of Education can borrow at low Treasury rates and lend at higher rates thus making this a money- making opportunity in a low-delinquency/default environment. Hence, the loan amount available to students continues to increase.
A matter of concern?
The growth in the student loan delinquency rate is also smaller and less rapid than for other types of loans. It has increased by only 1.15 percentage points since Q3 2008, the slowest growth among the five, and it has increased by only 1.42 points since the beginning of 2003, the second-smallest growth following credit cards.
Although, the amount of student loans have increased, the growth in delinquency rate is not as alarming as the delinquency rate for other loans. Despite the financial crisis in 2008, there hasn’t been a sharp increase in student loan delinquency rate.
However, repayment of student loans become a severe concern when the job market is weak and is not producing enough high paying jobs for these students.
Student loans should not be a bubble as long as students can pay them back through their earnings after graduation from college, which is the rationale behind the growing amount of student loans outstanding. Lenders believe that expensive college educations will lead students to a well-paying job. However, the story has changed a bit since the Great Recession. With 20- to 24-year-old unemployment rate running at 12.9%, a growing number of college graduates are facing the prospect of not finding any job, not to mention a high-paying one.
It is also said that the actual delinquency rate is worse than the quoted one because loans are carried forward when students enter graduate schools instead of working in a job.
As more students attend undergraduate colleges and set foot into graduate schools instead of entering the labor market, they are essentially boosting the volume of student loans while delaying the start of the repayment period. But a loan can’t fall into delinquent status, by definition, during the period when no repayment is required. “A rolling loan gathers no loss.” This lowers delinquency rates, making them appear less ominous than they would be otherwise.
Although the delinquency rates are under control, a moderate rise would put drastic pressure on the US government given the already hyped “fiscal cliff”. It will be hard for the Government, the larger provider of these loans, to sustain this program if the future default/delinquency rates are disappointing. Thus, an increase in the delinquency/default rate could reduce the number of student loans significantly.
Any rise in student loan delinquency/default rates will be systemic in the sense that the burdens of the losses will be borne broadly by US taxpayers, thereby adding another item to a long list of US fiscal challenges. Arguably, the generosity of the
government as a student lender aids and abets the behavior of colleges as tuition raisers. All else equal, that lowers the economic return to higher education, raising the odds that the student borrowers of today will be the student loan delinquents of tomorrow.
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