Student-Loan Delinquencies Rise, Adding To Fears Of An Education Bubble

While the job market remains sluggish, student loan debt continues to rise, fueling fears that a higher-education spending bubble may be underway.

Outstanding student debt has climbed 25 percent since the start of the financial crisis in 2008, according to the Federal Reserve Bank of New York -- an increase from $440 billion then to $550 billion now. By contrast, every other major category of consumer debt, including mortgage debt, credit card debt, auto loans and home equity loans, is lower today than it was in the fall of 2008.

Not only has student debt risen precipitously, but more and more of those loans aren't getting paid off on time. In the second quarter of 2011, the rate of student loans that were more than 90 days past due rose from 10.6 percent to 11.2 percent, according to the New York Fed.

Looking at other major types of debt -- again, including home loans, auto loans and mortgage and credit card debt -- those delinquency rates either declined or stayed flat for the quarter. But delinquency rates for student loans rose and continue to rise.

Experts have warned for years that a bubble may be developing in higher education, as students take out loans to pay for tuition and then find themselves hamstrung by debt and unable to find a job once out of school.

The problems of student-loan delinquency and default are only expected to get worse. Salaries and employment rates for recent college graduates have dropped: The median starting salary for a member of the class of 2009 or 2010 is only $27,000, down from $30,000 a couple of years ago. A recent report from Moody's Analytics predicted that over the next few years, "many students will be unable to service their loans as income growth falls short of borrowers' expectations."

And the debt-ceiling deal that lawmakers reached in Washington earlier this month contains additional provisions that will make life harder for students taking out loans. One section of the deal changes the way interest is collected on a certain kind of federal loan for graduate students, meaning that those borrowers will start accruing interest on their loans before they've finished school.

The Moody's report found that student lending grew by at least 10 percent each year between 2000 and 2010, including during the financial crisis and the Great Recession.

"Fears of a bubble in educational spending are not without merit," the report warned.

Last month, the Chronicle of Higher Education reported that one out of every five government student loans that entered repayment in 1995 has since gone into default.

Yet a college degree still appears to be a significant advantage when it comes to the job market. A recent report from the Labor Department shows that for workers 25 and over with at least a bachelor's degree, the unemployment rate in July was 4.3 percent -- compared with 8.3 percent for workers with "some college," and 9.3 percent for workers with just a high school diploma.

In other words, while unemployment for high school graduates slightly exceeds the national rate of 9.1 percent, the jobless rate for college graduates is less than half that.

Comments

[fistofthejedi]

11:51 AM on 08/29/2011

What I don't understand is why certain fields charge so much for certain degrees. The schools know you're never going to get rich off of social work or teaching elementary school, but they still stick it to the people. I guess its greed. Also, some people fall into the professional student trap and just stay in school indefinitely so they don't have to work. But those loan payments will show up sooner or later.

[mynameisjen]

04:29 PM on 08/22/2011

I quit paying my loans back. I don't have money to pay them and my degree hasn't helped much in landing me a job. I did a year of AmeriCorps service to help pay them back, but the rates just kept going up. Education should be free - not a method of dividing the haves and have nots.

[fortressfountain]

01:30 PM on 08/22/2011

I think grade school and college should be taught on-line. I think the cost should go down a lot.
Fat chance of that happening-as they can always justify charging 100 million for everything.
Even non-union made autos are the same price or more than the union ones.

Once again the problem seems to be the banks-anyone surprised?

[Osusuki]

10:06 AM on 08/21/2011

I see two causes here: (1) Privatization of the student loan industry (which never should have been allowed to happen in the first place), and (2) Private college costs (which should never have been allowed to become so out of control). This country should have continued to support its public institutions of higher learning, both at the Federal and the State level. By not doing so, it removed all competition from what appeared to be a very lucrative market, and let private college costs explode. Then the added blow of privatization allowed lenders who never should have had a bite at this particular apple to siphon off the resources of people just getting their start in life after college. I have never seen a more plain and simple a reputation for failure, aside from conservative policies in general. This is just one more way conservatives, neo-conservatives and centrist democrat fellow travelers have ripped the fabric of this nation to shreds.

[gr8bsn]

05:30 AM on 08/21/2011

There is a crisis, it's linked directly to the job market, and this one is going to hit very hard. Yes, you can't get out of these loans, but, when one or two people default, the lenders have the resources to go after them. When 20%-30% (or more) of the people who got loans default, then the lenders themselves are facing a meltdown & a crisis. People are graduating from college, and after an 8-12 month job search, they give up on the higher salary they were promised and go back to the same job they had before or in my case, during college. These jobs barely pay enough to keep the lights on, and people are going to pay the rent before they pay the lender. The times are desperate out there. The one ray of hope I see from this is that like the housing bubble, when this bursts, school costs will have to finally plummet back to reasonable levels.

[Jono Cuie]

02:06 AM on 08/21/2011

I am currently studying at The University of Sydney. In my opinion, the Australian system for student debt is much better than the US system. Students that are Australian citizens have the option of taking out a loan from the government which is paid directly to the university. Australian students are not required to begin repaying this loan until their income recorded in Australia reaches a minimum of $47,196 in a fiscal year. At this threshold the debtor is required to pay 3% of their income towards repaying the loan to the Australian Tax Office. The more income someone makes, the higher percentage of their income they are required to pay. If the debtor does not qualify to make any payments for seven consecutive years, the debt is canceled. This system is called HECS-Help and Fee-Help, for undergraduate and postgraduate respectively.

Australia also has a widely used system for students called Youth Allowance that pays eligible students between $212.70-$611.90 every two weeks.

Furthermore, if a student is unemployed when they graduate, they could qualify for a program called Newstart. Biweekly Newstart allowances range from $474.90-$625.90. To qualify for this program a person has to: be unemployed; be actively looking for work through program specifications; have liquid assets that are less than $3,000 if they are single or $6,000 if they have a dependent.

Ladies and gentlemen, this is how socialism works.

[blitznstitch]

07:22 PM on 08/20/2011

increase in default does not match the low unemployment numbers because the unemployment numbers only count for those who are actively seeking work. So, there is a large unemployed and not looking segment of our population not paying there student loans? Perhaps... The thing is that not all undergraduate degress are worth the paper they are printed on. Go into Math and Engineering, Chemistry, Physics, Not Biology. Go into degrees that lead to IT jobs. All liberal arts majors are crap.

[jeffgolin]

05:25 PM on 08/20/2011

There was a Golden Age here in California when tuition in the state colleges and universities was free, until ole Uncle Ronnie became governmor and declared that these were all bums and freeloaders and started to make school a haven for the children of the rich, or those that wanted to undertake massive debts they could not pay. At that time California's economy and education was first in the nation and we were the mos sought after state for the best and brightest. This is the result of Republican thinking.

[jeffgolin]

04:53 PM on 08/20/2011

There was a story in the news recently about a law grad that was denied admission to the bar because he "didn't have a plan to pay off his student loan" and thus failed the moral turpitude test for sitting for the bar exam. Talk about circular reasoning working against you.

[jeffgolin]

05:19 PM on 08/20/2011

Here's the story:
http://jonathanturley.org/2009/07/03/new-york-judges-deny-admission-to-bar-for-lawyer-with-400000-in-student-loans/

[jeffgolin]

05:20 PM on 08/20/2011

Sorry about that, correction, he did sit for the bar, four times, and finally passed, but then they would not let him practice as an attorney, even though if he were allowed to practice he might be able to pay back his loans. Gotta love these judges.

[Kenz300]

04:45 PM on 08/20/2011

After the great depression multiple generations of families lived together in the same home or two flat building. It took until the 1950's for the economy to pick up and younger people were able to move out on their own at an earlier age. We are moving back to the previous times where children in their 20's and 30's are moving back in with their parents because they can not get a job that pays enough to support them. The American dream of each generation doing better than the last is over. Families need to come together to help one another survive.

[Kenz300]

04:36 PM on 08/20/2011

You can not pay off a student loan if you do not have a job..

It is time to focus on jobs in this country.....

Mr Bohener and the Republicans ... where are all those jobs bills you promised?

The Republicans helped tank the economy with their lack of compromise on the deficit extension. They caused the S&P downgrade with their lack of compromise. They want to end Medicare and give you a voucher. Good luck finding health insurance you can afford. They want to end Social Security and give you a 201K. Your children will never be able to retire. They talk about the deficit but still want to give more tax breaks to the top 2% and big corporations.

These Republicans are too extreme.

[txbrtsr]

07:08 PM on 08/19/2011

Both of my degrees are from smaller, less-costly state-funded universities. Not at all prestigious, but I was able to pay my way through without going into debt. I joke to my friends who graduated from big-name schools that I'm going to put one of those bumper stickers on my diploma that reads "Don't Laugh. It's Paid For".

[karen1p]

12:26 PM on 08/20/2011

Yep, I too, worked my way through school waitressing and doing anything and everything. My senior year, finals week, I worked 53 hours in addition to finals. Can't imagine it NOW!

What you don't know is that the rules have changed regarding claiming independance. Now, they cannot claim independance until something like in their 20's and by that time, I was almost done with school. So, the rules have changed, somewhat to make school more expensive, even at those state-funded colleges.

[surfandshop]

06:32 PM on 08/19/2011

I believe that the student loan delinquency will cause huge problems, loans are given to people who will never be able to pay it off. Student loans are taken out by immigrants, new moms on welfare, and the unemployed as a way to have money to live on. They drop out of school each semester after receiving the loan. Then enroll again the next semester for more monies. What a shame, especially for community colleges. Their graduation rate is low because of this abuse.

[dporterdvd]

06:05 PM on 08/19/2011

If we have a shortage of engineers and doctors in this country, why aren't better loan rates offered to students who pursue careers in those fields where there are more jobs?

or would this type of social engineering be bad?

[cruiser049]

12:04 PM on 08/21/2011

Because we can just hire foreign doctors and engineers.

[IndyVoter777]

08:51 AM on 08/19/2011

Wait a second! California UC's just approved pay raises that add up to "100's of millions" and we are killing our kids with this much debt?

What a joke.