The Higher Education Bubble (Part 2)
Why Business Owners Should Care About the Dangers of Student Loan Defaults
Part 2: The default rate on student loans is understated, and the students are borrowing more.
Some good news on student loans for a change? The default rate for student loans actually decreased 14.7% in 2013 to 13.7% in 2014. Whew. We were getting concerned, as you may know.
"Nationally, the default rate has declined to 13.7 percent for borrowers who entered repayment in 2011, a nearly 7 percent decrease from 14.7 percent for those who entered repayment in 2010. The drop also occurred in all sectors of higher education institutions--public, private and for-profit colleges--despite the fact that 650,000 more students [defaulted on their loans]."
Wait. What? Consider the following:
The default rate is still above the default rate of the belly of the recession, 2009-11 (13.4%).
The total student loans outstanding are increasing at around $100 Billion a year. As the economy has improved, the percentage of student loans "in default" has dropped. But the raw number of additional defaulted loans is 650,000 for 2011-13. The raw number of defaulted loans for 2010-2012 was 600,000.
So an 8.3% increase in the number of actual defaults. The rate is going down because the denominator, total loans, is exploding. 4 Million loans started paying in 2010-2012. 4.7 Million loans started paying in 2011-2013. A 17.5% increase in the total number of loans.
Because this data is only for the past three years (2011-2013), the "13.7% default rate" does not include any loans where payments started before September 30, 2010. The defaulted loans that are still in default, but no longer used in the calculation, are still out there.
In all likelihood, the default percentage dropped because the people who had to start making payments in 2009-2010 are no longer counted in the default rate. Does anyone remember lots of college graduates landing jobs in 2009-2010?
While the "official default rate" is 13.7%, the government considers a student loan "in default" if the borrower's payments are 270 days delinquent. 9 months. Banks must consider a loan delinquent if payments are 30 days behind. So the number of student loans 30+ days delinquent is likely a considerably higher number.
If there are 650,000 loans 270+ days delinquent on payments, how many are 30-270 days delinquent and only waiting to be added to next year's list. Or think of it this way: despite dropping all of the poor souls whose student loan payments started in 2009-10, the total number of loans in default increased by 8.3%.
The default rate on residential real estate loans held by banks is 6.98% as of Q3 2014. The default rate on credit cards is 2.21%. Business loans: 0.76%. And privately-held, non-guaranteed student loan debt? 3%, according to congressional testimony.
Borrowers who are still in school do not have to make payments. Payments do not start until 6 months after a person graduates or drops out of college. So the earliest one would be considered in default would be 15 months after graduation or dropping out.
Most of the loans added to the calculation would be people who started school in 2010 or 2012 and just graduated A very large percentage, probably at least 1/3 to 1/2 of the total student loan debt are loans made in the last 4 years that haven't made a single payment yet.
Among those who have student loans, the average 2014 bachelor's degree graduate with student loans has $33,000 in student debt. The average 2008 graduate had $25,000, which is a 32% increase. The average graduate student has $55,000 in student debt. This indebtedness to the government has a ripple effect through the private economy, as money used to pay back the government can't be used to buy houses, save for retirement, etc.
But if the default rate is actually much higher, wouldn't we see financial stress apparent at colleges and universities? Actually if you know where to look, it's already happening. We will discuss this in the next installment.
