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Student Loans Now Greater Than Credit Card Debt

posted by Bob Lawless

Total outstanding student loan debt now exceeds credit card debt, as reported yesterday in the Wall Street Journal which in turn elaborated on a web article by Mark Kantrowitz, publisher of FinAid.org. Revolving consumer credit according to the Federal Reserve is $826 billion. Kantrowitz calculates outstanding student loan debt at almost $830 billion.

The Federal Reserve does not separately report student loan debt--and why not? Instead, the Federal Reserve rolls student loan debt into nonrevolving debt along with auto loans and other installment loans. Thus, Kantrowitz has to rely on other sources. For public student loan debt, Kantrowitz does his calculations off an analysis of the federal budget, and for private student loan, Kantrowitz relies on a model he has developed. He estimates there is $605.6 billion outstanding in federal student loans and $167.8 billion outstanding in private student loans.

Credit card debt actually has been declining, an unprecedented fact historically, and is off almost 14% from its 2008 high of $958 billion. Other forms of credit have been tight and hard to obtain. In contrast, Kantrowitz's numbers suggest student loan debt has been increasing.

All of these facts suggest more questions than answers for me. Should we be concerned as a policy matter about rising levels of student debt, or is this just an indication of a populace investing in human capital during a financial downturn? Are growing levels of student loan debt sustainable? If not, what are the implications for universities (and, gasp, law schools)? Did the 2005 changes to the bankruptcy laws that made most private student loan debt nondischargeable contribute to growing student debt (in that private lenders were more willing to lend with the belief that student borrowers would not discharge their debt)? Among the facts to consider is another recent post of mine about a report on high student loan default rates.

Comments

Off the top of my head - while the cost of housing and goods fluctuates, the cost of tuition simply increases, rendering student loans more "necessary," esp. with stagnating wages.

More questions than answers, perhaps?

Thanks, Katie. I fixed it.

Indentured Servitude 2.0

This has nothing to do with investing in human capital. College education is the perfect storm for inflation. At least with healthcare there's new supply (e.g. new hospitals, practices, etc). But with education there are no new non-profit schools at all, thus limiting choice. Meanwhile, reputations are insanely sticky, you cant get a halfway decent job without a degree, society deems college education as a universal goal, etc. And yes, the worst part of it is the government subsidized, underpriced student loans, which only have the effect of driving people deeper into debt while further juicing tuition inflation. Credit card debt is at least partially discretionary, but college education is viewed as, for better or worse, a necessity. At some point the government will step in and cap tuition across all schools. And a lot of those loans are going to default.

If you talk demographics, student loans are probably present amongst individuals for themselves and parents for their children 18 - 55 probably. So it is unlikely that it is a different demographic than credit cards which probably taper off with seniors as well.

Individuals in schools are avoiding the job marketplace and retooling in expectation of potential recovery. But, it also speaks of the emergence of for profit schools which are raising tuition costs over their community college alternatives. The latter are problematic if they are not confering the skills necessary for job placement and just producing diplomas. However, non-profit institutions have also entered into a host of leisure related disciplines which are unlikely to have a lot of market value themselves (arts, humanities, and culture). Not that I don't value those things significantly, but I don't know whether they will produce a net increase in productivity.

These loans are subsidized but they are more secure because the government can collect on the debt (lower likelihood of default as opposed to credit cards).

Increased private spending on education is also more likely to be spent locally (teachers, facilities) rather than on imports (tvs, consumables) so it is going to have a greater impact on local and regional economies rather than net exporting nations. Therein that money stays in the USA rather having a net increase effect on our deficit.

Tuition inflation is also due to cutbacks by state and federal government as well as a switch to the business-based model for institutional management in universities.

Are there no prisons? Are there no workhouses? The ladder up now leads to nothing but a meatgrinder. Such a system we've built.

I'm in the camp that sees tuition inflation more like a credit/asset bubble than inflation in the true sense. Agree completely with Stelios that the availability of low-interest, sovereign-backed credit has prompted higher ed to add departments/majors of debatable social utility.

And why only "exit counseling" from financial aid offices for graduating students and not up-front warnings about a lifetime of nondischargable indebtedness? (A rhetorical question)

Sounds like a job (one of many) for Super Warren.

Too bad Americans have lost the concept of the "average" people.

Do average people need college educations?
Do enough average jobs exist for average people?
Does the concept of average people really exists, or is everybody really above average?
Does anybody know anybody else that is average?
Does anybody think they are average?

College is just another American society optimism ponsi scheme.

My opinion is that a big junk of the rise in student loans is directly tied to the rise of "for profit" colleges or universities like the University of Phoenix. These, and other "trade" schools, advertise non stop and push students into loans regardless of their ability, aptitude or future prospects. That coupled with the tradional state and private schools where tuition continues to increase year in year out, and you have students and parents left with no choice but the borrow. And no one counsels parents or students on the risks, future prosepctive income as it relates to the cost of their field of study in relation to the amount being borrowed. Think for example why it costs the same tuition dollar per hour to train to be a teacher, engineer or physical therapist at most colleges and universities...

Certain private schools simply milk the system for cash, preying, like savanna predators, on the weak and helpless.

One of my in-laws recently got her green card. Somehow that fact was revealed to telemarketers: she was promptly inundated with high-pressure sales calls from the University of Phoenix and similar.

Their pitches were all the same. Welcome to America. You need a college degree to get anywhere. We can help you. We'll accept anybody. A degree will cost you $130k. No cash? No problem. Sign here for easy credit, nothing down.

They fail to mention certain details. Educational debt is non-dischargeable -- even survives bankruptcy. Degrees from these schools are often unmarketable. Little details.

No other country has such a complicated educational system, so new immigrants have no way to judge the merits. Many simply sign up for the first good sales pitch, and their finances are ruined for a decade.

By sheer luck, she happened to mention to me she was about to enroll at U of Phoenix. I googled for 5 minutes, and alerted her to a public junior college within walking distance of her apartment, offering the exact nursing degree she wanted, for $25 per unit, or $5000 all in.

She couldn't believe it at first. How could there be a direct substitute that was 97% cheaper than the phone offer? How could she not know about it? Sadly, her extended family argued against me, because many of them had already taken on these crushing debts from heavily marketed private schools, and couldn't or wouldn't believe there was a nearly free alternative.

Finally she walked over to the JC. Love at first sight. She's in. One person's financial life saved. But this was pure luck -- what about everyone else?

Another good reason why we should be able to pay off Student loan debt over or to the detriment of general unsecured creditors in Chapter 13. It just makes no sense to me to classify student loan debt as unsecured debts in 13 when ultimately they can't be discharged. If the debtors have the means then they should be allowed to set student loans as a priority over general unsecured debts in 13. Allow them to discharge that type of liability in 13 and our professionals will have more disposable income later on....

We've come a hundred and eighty degrees away from the notion that practical people didn't go to college, but got right down to the business of work. This was a common idea in the 1920s and 30s. It was not until the GI Bill opened college to so many returning GIs and white collar work in the expanding government and corporate sectors started using 'college degree' as a line of demarcation that the college degree became a necessity in the '60s and '70s. It has been difficult for our society to acknowledge that college doesn't mean the same thing in a world without jobs.

Paradoxically, there are so many more ways to learn these days, thanks to the internet. I believe you could set up your own course of study with well qualified tutors for a fraction of the cost of college. You'd have the substance without getting your ticket stamped. This might be more difficult in the sciences, where you need access to a lab. This idea begs the question, 'is substance what we're really after?'

Randy and Jim, I think, are steering this thread in a more productive direction. It is a bit of an exaggeration, but basically student debt falls into two tranches: low-default non-profit debt, and high-default for-profit debt. There are some legitimate for-profit trade schools, but too many of them are machines for hoovering up government-guaranteed (or government-provided) student loans. In other words, student loans funding these institutions are the product of salesmanship. The default rates are sky-high, because the seller is not the lender. In contrast, most nonprofit educational institutions are in the education business, not the ripoff business. They have defaults, but many less.

The solution is fairly obvious: no government lending support for the for-profits. Let them fund their own students. They can only make money doing so if their students default only seldom. And they can only do this if their students get jobs.

"Are growing levels of student loan debt sustainable? If not, what are the implications for universities (and, gasp, law schools)?"

Bob, my blog strives to answer your question regarding law schools.

The Federal Reserve has separately reported some student loan balances for the past six years in the Consumer Credit (G.19) Report. It was recently relabeled "Federal government," though, making it somewhat opaque.

The Fed backloaded old data prior to 2004 when it added the student loan category.
http://www.federalreserve.gov/releases/g19/attachment2.pdf

Several unusual things about the Fed's approach:

1. At the beginning it only included loans held by Sallie Mae and DoEd. When Sallie Mae completely phased out of its GSE function in 2003-04, the Fed stopped including Sallie Mae borrower balances.

2. The Fed has an almost religious zeal that accrued interest does not count as part of the balance -- despite the fact that the borrower is contractually bound to pay it, and this is how simple interest works in the real world. Thus, the Fed's approach only includes outstanding principal balance. For nondefaulted loans, this doesn't make much of a difference.

3. Starting with March 2009 numbers, data are revised to incorporate FFELP loans purchased by the Department of Education under the 2007-08, 2008-09 and 2009-10 Loan Purchase Programs. It is not clear whether this includes other FFELP loans DoEd handles (although the dollar balance of the misc. categories is small).
http://www.federalreserve.gov/feeds/g19.html

Among the federal student loan programs alone, the dollar balance is $750 billion and heading towards $800 billion by the end of the year. With Dr. Kantrowitz's estimates of non-federal ("private") balances added in, the total educational loan balances would exceed $900 billion.

This is not surprising. In my consumer law practice here in D.C. we focus quite extensively on debt. Nearly every week we get calls from current doctors, lawyers or other professionals that are having difficulty repaying their loans. There often is a lot of shame involved. The current state of the economy has made things worse. There are options out there for borrowers who are struggling, many of our clients have found success -but it isn't easy.

Is student loan debt securitized in the same way as other debt, such as credit card debt? What are the differences if any between gov't guaranteed and private student loan debt? Did the price for securitized private student loan debt change after the 2005 amendments made private student loans nondischargeable in bankruptcy except for undue hardship?

Is there a coming bubble in student loan debt? I'm not sure how that would even work. Is student loan nondischargeabilty the rough equivalent of nonmodification of home mortages in Chapter 13? Something that makes it look like the loan is a safer investment than it really is. fool's good for the investor who buys the securitized student loan package?

Just as the academics who run this blog have advocated a duty of clearer disclosure by financial institutions regarding loans to ordinary consumers, I believe a duty should be imposed on academic institutions to disclose to their students the economic consequences of their college attendance, particularly what jobs the college's graduates are landing, how much they are making, how many of them are landing jobs at all, what majors are landing jobs, and compare that to the cost of attending said college. I believe that, just as Professor Warren sponsored the metaphor of an "exploding toaster" to characterize mortgages that did not yield home buyers the results they expected, there are equally many citizens who find out too late that the debt they ran up to pay for college or graduate school is itself an "exploding toaster" because they never had any one explain to them the economic cost/benefit analysis of their educational choices.

Yes, federally-guaranteed student loan debt is securitized in the same way as auto loans, credit cards and mortgage debt. It begin in the late 1980s/early 1990s and was booming by the mid-2000s. At the beginning of 2008 the international credit markets froze up, and new securitizations ground to nearly a complete halt. It is gradually warming up again. Apparently international investors simply lost their taste for securitizations, not realizing that this (federally-guaranteed student loans) was one of the safest investments known. The loans are government-guaranteed in case of default. A state or nonprofit guaranty agency (GA) pays 98% on a default claim out of federal funds managed by the GA, and then Uncle Sam immediately pays reinsurance to the guaranty agency. For other types of claims, such as death or disability, loans have a 100% guaranty. The claim guaranty is really only the beginning of the benefits, though. The loans are eligible to receive a quarterly payment (to the loan holder) from Uncle Sam that protects against fluctuations in market interest rates during the year.

State lenders, which generally were created to serve as secondary markets in the federally-guaranteed student loan program for a specific state, traditionally raised capital through the sales of municipal bonds, but, as the credit bubble grew during the past 15 or 20 years they began tapping securitization markets as well.

"Shadow banking" grew rapidly in the federal student loan program during the early 2000s. Particularly in the specialization of federal loan consolidation, a coterie of nonbank lenders arose, and they were entirely dependent on complex means of raising capital. They were generally unable to make new loans after 2008 began.

The private education loan market also grew to depend on securitization. Filling a gap between cost of attendance, which always rises much faster than inflation, and federal loan limits which never increased for years and, in some cases, for decades, private education loan volume was growing at rates of 10 to 30 percent per year until the credit crisis began in 2008. However, the market is apparently getting a small shot in the arm from the end of federally-guaranteed lending (no new loans after 6/30/10), in that state agencies are shifted from federal to private lending volume. Most of them already had private loan products, and, in fact, for some of them, private lending had already been their specialization.

The thing that federal student lenders had to deal with is the learning curve for international investors on a credit product which is very different from other consumer loan products. Borrowers can receive year-long deferments and forbearances -- legal "entitlements" for those who qualify and know about applying -- which can reduce cash flow. It takes one year of delinquency to default -- much longer than typically seen in consumer lending. The benefit of course is that lenders have a very long time to "rescue" borrowers and get their loans back into a cash-flow-generating status.

I still believe that providing a free education for all the students who wants to be in college will decrease this student loan debt exponentially.

the facts that students loans are not forgivable is crime, a neighbor boy 18 years told me that brown college cooking school just raised there tution this year from 32k to 62 k that is a crime. most of those students end up working applebees or chillis and never make it.

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