Student loan defaults rising

Student loan defaults rising
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“if you think education is expensive now, wait til you how much it costs when it’s free”

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.” Congress created these nifty plans in 2012 for new borrowers, but then the Obama Administration expanded them retroactively to reduce defaults, buy off millennial voters and disguise the cost of its student-loan takeover…

CBO now projects a $306.7 billion cost to taxpayers over the next 10 years [vs a $58B savings originally]. 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.

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This number by itself is meaningless. Need to know where it went, what it was as a percentage of loans issued or serviced, and how it compares to the private sector. Right?

Pay off your student loans, deadbeats!

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Those things matter too, but coming in at 2-3x the government estimates of the admin costs makes me distrust the whole government management of the process. Plus a lot of this is outsourced to private companies, so it’s taxpayer money going out the door to the private sector, rather than just government administrative bloat.

As a ballpark, the Feds were spending about 0.2% annually ($2.9B admin vs $1.5T in loans), while if you look at one of the major for-profit education loan servicers (NYSE:NNI if you want to buy into the profitable side of this bubble), their revenues are about 0.1% of their loan portfolio.

For me kind of old news.

I remember about 10 years ago we were discussing student loans on Fatwallet. I basically explained that the government was understating the losses, constantly coming out with new student loan bailout programs to hide the losses, and that at least 30% of these loans will never be paid and dumped on the taxpayer.

The income based repayment plans are a joke… someone can be determined to have to pay $0 a month, and that $0 a month “payment” means the loan is considered current and not in default.

The loans are already well on their way to being socialized.

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That was to be expected. This is just the flip side of lowering tax revenues and the corresponding spending cuts resulting in decreased government funding for colleges. Colleges will get paid either way. It’s a zero-sum game. What you save on the funding side ends up being losses in federal loans from students overburdened due to rising costs. (if you looked at the college costs and adjusted for inflation and a stable level of state funding, over the last 10 years, costs would have been essentially flat)

I just don’t see how you can reconcile a policy that aims at improving social mobility via easier access to higher education with an expectation of avoiding the wealth redistribution that comes with it.

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Well, to add to Shandril’s point. It was MORE socialized in my days when there was much more funding from state and fed. I graduated with only $8k in loans.

I think people forgot about that when the cost is buried in layers of funding sources.

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The states and federal government did not spend more on college funding back in your day than they do now. On the contrary, it was very much the opposite. The difference was what colleges charged for tuition.

I disagree, but only from a gut feeling, as I haven’t had to look at college tuition in many, many moons. I was fortunate to not have any college loans due to working my way through school.

The biggest difference I see in colleges today is that most have expanded their course catalogs so much and not controlled spending enough, causing their tuition to skyrocket. Of course, if everyone can get college loans, there is nothing to limit tuition.

Imagine a person decides to buy an new car Hyundai economy car. He has plans to negotiate the price as low as possible. As he is walking into the dealership, Uncle Sam is already there to let the dealership know not to worry, that he can afford any price and that the US taxpayer will loan any amount of money neccessary to make the transaction happen.

At that point the dealership decides to jack up all their car prices.

By the end of the day the man decides that he might as well get a Maserati since the taxpayer is on the hook for the loan. He leaves the dealership with far more than he needed and is now loaded up with federal taxpayer guaranteed debt.

That in a nut shell is the college education industry.

Colleges compete to offer luxury dorms, resort like facilities, and gourmet meals. Take a look at some of the websites Universities are using to sell to potential students.

When families paid for college with their own money in the 1960’s the accomodations were much more frugal and the tuitions much more affordable.

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Dang! I should have went to Mizzou!

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That is somewhat true. What is called student services has ballooned at some campuses beyond belief. The root of the problem is the competition between colleges to attract students. There is high demand for college but at the same time, a lot of colleges fighting for them. There is no end in sight for this trend honestly. Think of it a bit like an airplane or a cruise ship. They have invested a ton in the vehicle so they need to fill it to capacity to maximize return on investment (valid even for not-for-profit institutions btw).

Colleges compete on several fronts. Student services is one. The point is to attract students who fall in love with a particular college for the wrong reasons (aka not academic or financial ones). Students falling in love with a college tend to go there no matter the cost… Can’t entirely blame universities for stupidity there though. Especially true when it comes to elite or prestigious institutions. The thinking of going to the absolute best ranked university you can get admitted to is another myth carefully cultivated by the industry. Studies have proven that it’s actually mostly detrimental (30% less graduation rate in STEM to be exact) due to big pond effect but yet you hear it all the time from parents and teachers (“Why would your kid go to X when they could go to Y which is so much better ranked?”). But this pushes costs higher since students going to their top choices usually get very little in merit aid (since you don’t need to bribe them at all to go).

Position in the US News College Rankings is another major avenue of competition. You want to get good students to bump your rankings. That’s where merit-based scholarships come in. You essentially bribe students who could go to a higher ranked college to come to your college in exchange for a discount. And what you discount on one hand, you get back in other ways. The most obvious one is room and board since now many college force students to spend at least 2 years in college-owned housing with meal plans attached. At public universities, tuition is often state regulated to keep costs in check a bit. But room and board is totally uncontrolled… guess which rose by 3% annually in the last few years and which rose by 7-8% over the same period?

But back to merit scholarship to boost rankings, this is a cost for universities, so somebody else needs to pay it hence increased tuition across the board and/or increase in addon fees passed to the students (tech fees, general fees, student services fees, etc…) Those fees used to be included in the total tuition but some can now be excluded so yeah tuition is kept at inflation increased but everything else is not to make up for it.

Another reason for higher cost is simply labor costs. Universities have to provide ratio of student to professors for stats. Since many people equate lower ratio with better education (there is a correlation but not as much as you’d think past a certain ratio). That forces colleges to keep staffing high. And in some fields (engineering especially), this is a tough since those faculty could get quite high compensation in private sector otherwise and colleges have been forced to align their compensations.

The final part IMO is FAFSA. The use of EFC has been corrupted completely. The ludicrously high caps on need-based scholarships are well exemplified by l33tsauce’s car dealership analogy. If your EFC is $10k, your bottom line is gonna be the same. So why not go for the more expensive colleges? After all, you’re not paying more. And those same college can then overcharge you all they want. Need-based scholarships need a complete revamp. IMO the solution involves enforcing a much lower cap on this aid. Yes it may restrict choices to the more affordable institutions. But once you graduate and get your first job, nobody gives a damn where you went to college.

Anyway, there are many reasons behind rising costs and the resulting higher defaults on loans. But finaid and the promotion of the “college experience” certainly are a major part of the issue.

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In my limited experience the luxury dorms, resort-like facilities and gourmet meals cost EXTRA – they should not be included in the costs considered by the financial aid package.

That’s a myth, at least in tech. Your college (and GPA) is gonna be on your resume for a very long time (forever?). I think unless you are extremely specialized and in high demand, it’s going to be difficult to get an interview if you don’t have the right college listed. Where you went to school and how well you did tells me almost everything I need to know about your intellectual abilities.

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I agree. However, it tells me very little about your future job performance.

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In my field (chemical research), it’s nearly irrelevant where you went to college. What GPA you got is relevant because it places you vs your peers at that college. But the main emphasis is gonna be on what awards you got, what grants you got, and most importantly what papers/patents you are the main author for. You could have gone to a college I’ve never heard of, if you churned out a half dozen patents in 2-3 years, that tells me everything I need to know about your future job performance. Also, where you got employed (and for how long) matters considerably more than what college you went to. 5 years down the line, I’m not even looking at what you did in college (beyond as a small talk item to break the ice maybe). Whether you have produced the goods elsewhere, will be very easily measurable.

So I guess it may be field dependent and varies on whether previous job performance can be easily assessed by measurable achievements. If it cannot be determined easily from previous employment, maybe college matters more.

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Nailed it. I recently accessed the website of the University I attended for grad studies almost 30 years ago. There are no dorms now; instead, they built multi-story condo type structures with studios and 1-2 bd. apartments. Plenty of included extras such as on site gym, patios, high ceilings, … The studio rent is higher than renting an apartment off campus. The 1 bd. rent is higher than what a comparable 2 bd. goes for in my current (expensive West Coast) city.
It makes me wonder how students rack up that kind of debt and still have peace of mind while at school.

Ignorance and poor/non-existent early financial education. It’s probably one of the main reasons for the student loan “crisis”. Students borrow because they can, with little thought towards estimating their ability to pay back.

I did the math before taking out college loans – I looked at average compensation for my chosen degree and estimated the difficulty of making those payments (I also had choices and could have gotten the same degree for free from a less prestigious school near my home). Difficult to have sympathy for kids that go after overpriced degrees with poor job prospects.

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But I feel there could be more ways to protect some kids from their own frivolity/stupidity/ignorance. It just feels a bit too easy to fall for tricks currently.

For example, I like the concept of financial aid setup in the form of an income share agreement because those could take into account expectations of future income prospects but also puts a bit more skin in the game from colleges themselves to make sure their students are more successful. Plus it may talk more practically to some students in terms of how much future earnings they agree to give up in exchange for the loan. That’s not something all students realize when they signup on normal student loans currently. So a $10k loan would be underwritten differently whether you major in chemical engineering or in religious studies: one would require surrendering 3% of income for 88 months, the other 4.3% of income for 116 months (using Purdue ISA comparison tool). I think that could give a bit better sense of whether the loan is worth it or not in terms of how much you’re mortgaging your future income from it.