name tag saying student loan Theimproved economy has yet to mean higher wages for graduates alreadystruggling to pay down massive debt, let alone ease the minds ofstudents staring down the barrel of six-digit loan obligations yetto come. (Photo: Shutterstock)

|

While Wall Street and U.S. President Donald Trump tout news of abooming stock market and low unemployment, college students may be quickto roll their eyes. The improved economy has yet to mean higher wages for graduates already strugglingto pay down massive debt, let alone ease the minds ofstudents staring down the barrel of six-digit loan obligations yetto come.

|

Federal student loans are the only consumer debt segment withcontinuous cumulative growth since the Great Recession. As the costof tuition and borrowing continue to rise, the result is a wideningdefault crisis that even Fed Chairman Jerome Powell labeled as acause for concern.

|

Related: As if student loans weren't enough, millennialsalso rack up the most medical debt

|

Student loans have seen almost 157 percent in cumulative growthover the last 11 years. By comparison, auto loan debt has grown 52percent while mortgage and credit card debt actually fell by about1 percent, according to a Bloomberg Global Data analysis of federalloans. All told, there's a whopping $1.5 trillion in student loansout there (through the second quarter of 2018), marking the secondlargest consumer debt segment in the country after mortgages,according to the Federal Reserve. And the number keeps growing.

|

Student loans are being issuedat unprecedented rates as more American students pursue highereducation. But the cost of tuition at both private and publicinstitutions is touching all-time highs while interest rates onstudent loans are also rising. Students are spending more timeworking instead of studying. (Some 85 percent of current studentsnow work paid jobs while enrolled.) Experts and analysts worry thatthe next generation of graduates could default on their loans ateven higher rates than in the immediate wake of the financialcrisis.

|

“Students aren't only facing increasing costs of collegetuition; they're facing increasing costs of borrowing to affordthat degree,” said John Hupalo, founder and chief executive ofInvite Education, an education financial planner. “That doublewhammy doesn't bode well for students paying off loans.”

|

Federal student loan debt currently has the highest 90+ daydelinquency rate of all household debt. More than 1 in 10 borrowersis at least 90 days delinquent, while mortgages and auto-loans havea 1.1 percent and 4 percent delinquency rate, respectively,according to Bloomberg Global Data. While mortgages and auto-loanshave seen an overall decrease in delinquencies since 2010, studentloan delinquency rates remain within a percentage point of theirall-time high in 2012.

|

Delinquencies escalated in thewake of the Great Recession as for-profit colleges pitchedthemselves as an end-run around low-paying jobs, explained JudithScott-Clayton, a Columbia University associate professor ofeconomics and education. But many of those degrees ultimatelyproved useless, leaving graduates with debt they couldn't payback.

|

Students attending for-profit universities and communitycolleges represented almost half of all borrowers leaving schooland beginning to repay loans in 2011. They also accounted for 70percent of all defaults. As a result, delinquencies skyrocketed inthe 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 factorsrather than average debt levels. “Delinquency is at crisis levelsfor borrowers, particularly for borrowers of color, borrowers whohave gone to a for-profit and borrowers who didn't ultimatelyobtain a degree,” she said, highlighting that each cohort is morelikely to miss repayments on their loans than other public andprivate 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 valuedin the marketplace—like post-graduate law or medicaldegrees—usually see a good return on their investment.

|

Hupalo agreed. “There's a systemic problem in the student loanmarket 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'tgraduating with degrees that pay back that cost.” Moreover, whilecollege dropouts and for-profit graduates often struggle to findjobs with high enough wages to pay for their education, minoritygraduates are more likely to face discrimination in labor markets,making matters worse.

|

The cost of borrowing has alsorisen over the last two years. Undergraduates saw interest ondirect subsidized and unsubsidized loans jump to 5 percent thisyear—the highest rate since 2009—while students seeking graduateand professional degrees now face a 6.6 percent interest rate,according to the U.S. Department of Education. (The federalgovernment pays off interest on direct subsidized loans while aborrower remains a student or if they defer loans upon graduation,but doesn't cover interest payments on unsubsidized loans).

|

“If you're in an interest-based plan, you see cost go up, whichworries me for students who are in school and have seen debt go upbefore they've even finished,” Scott-Clayton said. She saidborrowers with smaller amounts of debt, those most at risk ofdefault, should take advantage of income-based repayment plans ifthey can.

|

The deepening student debt crisis isn't just bad news forstudents and recent graduates. The delinquencies that come with itmay have a significant negative impact on the broader economy, theFed chairman told Congress earlier this year.

|

“You do stand to see longer-term negative effects on people whocan't pay off their student loans. It hurts their credit rating, itimpacts the entire half of their economic life,” Powell testifiedbefore the Senate Banking Committee in March. “As this goes on andas student loans continue to grow and become larger and larger,then it absolutely could hold back growth.”

|

“Students shouldn't assume their loan servicer has their bestinterest in mind.”

|

As young adults struggle to pay back their loans, they're forcedto make financial concessions that create a drag on the economy.Student debt has delayed household formation and led to a declinein home-ownership. Sixteen percent of young workers age 25 to 35lived with their parents in 2017, up 4 percent from 10 years prior,shows Bloomberg Intelligence.

|

“You have a whole generation of people that have a significantamount of student loans and its crimping demand for other goods andservices,” said Ira Jersey, the chief U.S. interest rate strategistfor Bloomberg Intelligence. “As people live with their parents orcohabit with a non-partner, millions of houses and apartmentsaren't being purchased. Neither is WiFi or that extra sofa. Wethink this is having a significant impact on the economy.”

|

Still, Jersey doesn't think the student debt crisis is as severeas the subprime collapse of a decade ago. “It's much different thanmortgages,” Jersey said. “Even though it's a crisis in that itincreases the deficit, and taxpayers have to pay more over time, itdoesn't present a systemic financial sector risk like mortgages in2007.”

|

However, that doesn't offer much consolation to students, six in10 of whom report frequent anxiety about their debt, according to areport from Chegg, an education technology company. To quell fearsof delinquency, Scott-Clayton said students should be proactive inresearching different repayment plans.

|

“You have to wonder if the lack of transparency surrounding[student] loans is intentional,” she said. “Students shouldn'tassume their loan servicer has their best interest in mind.”

|

Read more about the student debtcrisis:

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.