Last week the New York Federal Reserve President, William Dudley, gave a briefing on household debt with a particular focus on student loans. The briefing was based in part on a report just released by the NY Fed titled, Diplomas to Doorsteps: Education, Student Debt, and Homeownership.
The briefing highlighted the fact that household debt levels have almost returned to pre-crisis levels but the typical consumer’s balance sheet looks quite different. The big change is that consumers have moved away from housing related debt and accumulated much more student and auto loan debt.
At the same time, this increased student loan debt is having an impact on home ownership. Here is Fed President Dudley:
Those with significant student debt are much less likely to own a home at any given age than those who completed their education with little or no student debt… Of course, home ownership is more than just consumption — it has historically been an important form of wealth accumulation.
It is clear that burdensome student debt is now holding many people back financially. Student loan debt now stands at a staggering $1.3 trillion (as of the end of 2016) an increase of 170 percent over the preceding 10 years. There are three contributing factors to this increase:
- More students are taking out loans.
- The loans are for larger amounts.
- Borrower repayments have slowed down.
It is this last point that is the biggest cause for concern. Borrowers are now leaving school with over $30,000 in student loan debt and they are defaulting more. This is particularly true of those borrowers with balances of $100,000 or more. Over 20% of borrowers who left school in 2010 or 2011 owing that amount have already defaulted on this debt (a default means they are at least 270 days past due). That is an astonishingly bad default rate.
This Federal Reserve report is backed up by analysis released by the Consumer Federation of America last month. This analysis highlighted the total of $137 billion in student loan defaults at the end of 2016, more than 10% of the total loans outstanding. For most people this debt is not forgiven in a bankruptcy so it may lead to wage garnishment, damaged credit scores not to mention late fees and penalties. It is becoming a real problem and this is happening during a positive economic cycle.
Now, companies like SoFi, CommonBond, Earnest, Citizens Bank, Credible and many others are working to try and help students with this burdensome debt. SoFi invented student loan refinancing in 2011 and so this is still a very young industry. Consequently, the student loans books of all these companies are still tiny compared with the size of the problem.
What concerns me is not so much the HENRY (High Earners Not Rich Yet) segment popularized by SoFi. These are people who have sound finances as demonstrated by SoFi’s phenomenally low default rate of just a few basis points. The bigger problem is the millions of graduates who are struggling with debt, putting off buying a house, starting a family or a business and are often beginning their careers with more debt than their parents had ever accumulated in their lifetimes.
I don’t have the answer. But as the parent of a ten and eight year old I do wonder what life will be like for them when they get to college. I even wonder if college will be a financially sound option for young people in ten years’ time. I guess that is a topic for another time. This article is focused on the challenges with student debt and the impact this is having on society today.
Is student loan debt eventually going to eclipse residential real estate debt? I realize we are a long way away from that today but if you look at the trajectory of student loans that doesn’t seem impossible. Something has to give. I would love to hear the thoughts of Lend Academy readers so please sound off in the comments.
Is a college education a right or a privilege? It’s a difficult question.
Similarly, should the Govt. be more restrictive in lending (either based on a borrower or a school ‘score’?).
Schools need to have some skin in the game in terms of the value of education and employability for graduates.
I also have two kids ~10 years before college and I share your concerns.
RoHazzy, I am from Australia where in the 1980s my university degree at one of the leading colleges in Australia was completely free. Now, students have to pay a portion of the cost but it is a fraction of a typical US education. But today education is more of a privilege in this country and one that is becoming increasingly out of reach to many.
When credit is too lax, the prices of things the credit is used to purchase grow much more than they would otherwise. That is what happened with home prices and I believe that is what is happening in college tuition costs.
Good point Rawraw. Credit is too lax and with no risk based pricing many students are receiving loans at a far lower interest rate than they should receive. Of course, that would only make defaults worse.
I hope we see a nationwide college tuition correction like we saw in the housing market. But that may be wishful thinking.
I don’t think higher interest rates would help avoid this program of debt non-repayment. I think that being told “NO” would. Students would have to seek more affordable college options (in state, instead of private tuition) or have to prove and sign up for more lucrative majors: Computer engineering, etc. I see the problem that everyone is being told, yes, college is a way to a high paying job, then they take out $60K+ for a liberal arts degree, and can’t get hired for more than $25K/year. THAT is the problem. And they system lets them do that. And the borrowers do it. People need to plan for their future financial decisions based on earning potentials, and 18 year olds are not often poised to do that.
Even the more lucrative majors such as med school and law school leave students with massive debt that they’ll have to repay which can take many many years to pay off. Law school graduates are having a tough time finding good work just like any other graduate. The problem is tuition costs are too high and growing every year. A degree isn’t worth the same any more.
Peter – this is one of the biggest scams i.e. ponzi schemes this country is again coming up with. From housing in the last crash to student loans and auto loans in the coming one. It’s similar also to the disastrous situation in healthcare, where in this country we spend the most per capita in the world, for worse and worse outcomes, so go figure. I have a simple solution and one of the better arbitrage opportunities around: I’ll be sending my boys overseas (to Europe more precisely), where you can still get a top education basically for free (i.e. government subsidized), you’ll learn another language and culture while at it, and you’ll come back (if you come back) with a massive competitive advantage vs. all your peers, start life basically debt free and with many options to put to good use all that money that you haven’t spent.
Hi Yvan, I think international education is an interesting option and one I expect more students will undertake. I think eventually demand will shrink and pricing is going to have to change because the cost-benefit equation is changing.
This is indeed quite worrisome. Most propel don’t have the luxury or confidence to send their kids study abroad (although I agree with Ivan it’s an excellent solution). It’s a very Amercan issue, and one where proper regulation could help immensely. First ensure the schools and lenders have a skin in the game by making the loans partly employment-dependent, then force the schools to respect some expense ratios to be accredited. Isn’it ridiculous that sport coaches cost more than professors?
Good ideas Emmanuel. The amount of money generated by college sports is ridiculous although I would have no problem with that if it meant a less expensive education for all. But the opposite appears to be true.
Three things in an interrelated cycle cause this problem.
1. Masters/MBAs are the new norm. It is unlikely your BA in Political Science will land you a job good enough for you to buy a home/start a family. Especially if you have #2 below.
2. Only a very small percentage of students in the nation can get full scholarships. Strip out the athletes, and really, they don’t exist. So figure out how to pay $30-50k per year for a well respected school’s tuition, before ancillary living costs.
3. Most people that get higher degrees and have lots of borrowing will crowd into one of five US cities with large amounts of white collar jobs, paying 2-4x a starter mortgage to be in a dingy apartment.
All adds up to no home, and no family for average person under 40, and huge problem for US GDP in 10-20 years.
This entire issue is so infuriating. The only reason that private colleges can charge the $50k plus in annual tuition that they charge is thanks to the federal government’s student loan guarantee program. Add to this cost a college student’s annual living expenses (~$10k per year), and you have about a $250k total bill for a four year college degree. Students at private colleges that charge this crazy level of tuition are the ones who end up with well over $100k of student debt. Students attending community college for two years and then a public university for their final two years or students who attend state universities all four years are going to spend less than $100k all in for their degree. With family support (even from a middle class family), the student working a part-time job and securing other grants and scholarships that are available to college students can graduate with manageable levels of debt or no debt.
We’ve all seen in our careers that there is little difference in capabilities between state school grads and private college grads, yet the private schools grads are spending 2-3x more than the state school grads to get their degrees. And guess who finances a lot of this and will be on the hook when these private college and university grads can’t pay off their student debt? Who else but the taxpayer. There are only two ways these dynamics will change. One is to cap the debt per student that the federal government will guarantee to a level that reflects the cost of a state university education. Private colleges and universities will just have to adjust the the new reality. The other is for parents to help their children understand that, in most cases, it’s silly to insist on attending a school that costs 2-4x the expense associated with attending a state school or to borrow a lot of money to do it.