While Wall Street and U.S. President Donald Trump tout news of a booming stock market and low unemployment, college students may be quick to roll their eyes. The improved economy has yet to mean higher wages for graduates already struggling to pay down massive debt, let alone ease the minds of students staring down the barrel of six-digit loan obligations yet to come.
Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession. As the cost of tuition and borrowing continue to rise, the result is a widening default crisis that even Fed Chairman Jerome Powell labeled as a cause for concern.
Student loans have seen almost 157 percent in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52 percent while mortgage and credit card debt actually fell by about 1 percent, according to a Bloomberg Global Data analysis of federal loans. All told, there’s a whopping $1.4 trillion in federal student loans out there (through the second quarter of 2018), marking the second largest household debt segment in the country, after mortgages. And the number keeps growing.
“Students aren’t only facing increasing costs of college tuition; they’re facing increasing costs of borrowing to afford that degree,” said John Hupalo, founder and chief executive of Invite Education, an education financial planner. “That double whammy doesn’t bode well for students paying off loans.”
Federal student loan debt currently has the highest 90+ day delinquency rate of all household debt. More than 1 in 10 borrowers is at least 90 days delinquent, while mortgages and auto-loans have a 1.1 percent and 4 percent delinquency rate, respectively, according to Bloomberg Global Data. While mortgages and auto-loans have seen an overall decrease in delinquencies since 2010, student loan delinquency rates remain within a percentage point of their all-time high in 2012.
Delinquencies escalated in the wake of the Great Recession as for-profit colleges pitched themselves as an end-run around low-paying jobs, explained Judith Scott-Clayton, a Columbia University associate professor of economics and education. But many of those degrees ultimately proved useless, leaving graduates with debt they couldn’t pay back.
Students attending for-profit universities and community colleges represented almost half of all borrowers leaving school and beginning to repay loans in 2011. They also accounted for 70 percent of all defaults. As a result, delinquencies skyrocketed in the 2011-2012 academic year, reaching 11.73 percent.
Today, the student loan delinquency 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, particularly for borrowers of color, borrowers who have gone to a for-profit and borrowers who didn’t ultimately obtain a degree,” she said, highlighting that each cohort is more likely to miss repayments on their loans than other public and private college students.
Those most at risk of delinquency tend to be, counter-intuitively, those who’ve incurred smaller amounts of debt, explained Kali McFadden, senior research analyst at LendingTree. Graduates who leave school with six-figure degrees that are valued in the marketplace—like post-graduate law or medical degrees—usually see a good return on their investment.
Hupalo agreed. “There’s a systemic problem in the student loan market that doesn’t exist in the other asset classes,” he said. “Students need to get a job that allows them to pay off their debt. The delinquency rate will rise as long as students aren’t graduating with degrees that pay back that cost.” Moreover, while college dropouts and for-profit graduates often struggle to find jobs with high enough wages to pay for their education, minority graduates are more likely to face discrimination in labor markets, making matters worse.
America’s $1.5 trillion student-loan industry is a ‘failed social experiment’
Ask economists and policy makers to what extent we should be worried about 20 and 30-somethings’ historically high levels of student debt and you’ll get a broad spectrum of answers. After all, this group is also the most educated ever and higher education is becoming increasingly necessary to guarantee a decent standard of living in the U.S.
But ask many borrowers in this generation whether they worry about how the loans will affect their future and you’ll get a slew of bleak replies: It’s stopped them from getting their car fixed, switching jobs, buying a home and having children. Even a tax credit aimed at helping working low- and moderate-income Americans can be seized to repay defaulted student loans.
They feel that the $1.5 trillion in student debt has crippled their progress towards financial stability. A paper released Tuesday by the Roosevelt Institute aims to put some economic rationale behind those sentiments…