Student loans - the other debt crisis

Brookings Institute 2018

In a low unemployment economy, an entire generation is struggling, and millions are failing, to repay student loan debt. As many as 40% of ALL borrowers recently graduating are likely to default over the life of their student loans, according to a recent Brookings Institute analysis. Total outstanding student loan debt is approaching 1.5 trillion dollars, exceeding credit card debt, exceeding auto loan debt. Two other key points from the Brookings analysis: 1) for-profit schools remain the primary driver of high student loan defaults, and 2) black college graduates default at five times the rate of white college graduates, due to persistent unemployment, higher use of for-profit colleges and lower parental income and assets.

The rising delinquency (11% currently) and lifetime default rates are all the more disturbing given that federal student loan rules, in theory, permit all borrowers to repay based on a percentage of their income. Most student loans are funded by the U.S. Treasury, but administered by private contractors: student loan servicers. Study after study has found that student loan borrowers are systematically assigned to inappropriate payment plans,  yet the U.S. Education Department continues renewing contracts with these failing servicers. The weird public-private partnership Congress has created and tinkered with since the 1965 Higher Education Act is broken.

Unmanageable student loan debt will saddle a generation of students with burdens that will slow or halt them on the path to prosperity. Student loan collectors have supercreditor powers, to garnish wages and seize tax refunds without going to court, to charge collection fees up to 40%, to deny graduates access to transcripts and job licenses, and to keep pursuing debts, zombie-like, even after borrowers go through bankruptcy and discharge other debts. Recent graduates cannot get mortgages to buy homes, even if they are not in default, because their student loan payments are taking such a bite out of their monthly incomes. State legislatures have piled on educational requirements for a variety of entry-level jobs (nurse's aides, child care workers, teachers, etc.) while cutting state funding for public colleges and increasing tuition: unfunded job mandates. Finally, the combination of high debt and the harsh consequences of default are widening the racial wealth and income gaps.

Current reform proposals would make a bad situation worse. For example, it is difficult to see how increasing the percentage of income required for income-based repayment plans will help student borrowers, nor how extending the repayment period before loan retirement would reduce defaults. What is needed instead is to 1) deal with the for-profit school problem, 2) restore the state-level commitment to funding public colleges, 3) fix the broken federal student loan servicer contracting, 4) rethink the collection and bankruptcy regime for student loans and 5) repeal the student loan tax, i.e. the above-cost interest rates college graduates pay to the Treasury. Among other things. More on these themes in later posts.

Comments

[Thomas Wicklund]

What are traditional private college default rates? Are the public college default rates also split between in-state and out of state students? I ask because at first glance (haven't looked at the report in detail) the graphs are consistent with a simple "higher tuition means higher default rates" argument.

The other troubling trend I see is significantly increased default rates for 2003-2004 2 year graduates, implying an associate degree might not be worth the cost.

[Andy Miofsky]

As to point 2 of the Brookings analysis: current Bureau of Labor stats show black unemployment at the lowest point in 10 years. If unemployment is a factor in the black grad default rate why are black college grads unemployed in this economy? https://data.bls.gov/timeseries/LNS14000006

[Knute Rife]

There really isn't a good reason for-profit schools. Talk about moral hazard. As for the increasing defaults for 2-year schools, I suspect at least part of that is due to the nonenforcement of the ADEA and other such laws. Increasing numbers in those schools are middle-aged people seeking retraining, but hiring officers won't give applicants over 40 the time of day, and they get away with it.