College debt levels higher than all other types of consumer loans

by Grace

The Wall Street Journal picked its top ten economic charts of 2012, including one published in November showing that outstanding student loan debt now “outpaces all other nonhousing consumer debt”.  (Bear in mind the chart does not include unreported student loan “shadow debt” that could increase these figures by one-third or more.)

20121231.COCCollegeDebtLevels1

U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion in the third quarter, the Federal Reserve Bank of New York said Tuesday. Overall household borrowing fell during that period.

Payments on 11% of student-loan balances were 90 or more days behind at the end of September, up from 8.9% at the end of June, a rate that now exceeds that for credit cards. Delinquency rates for all other consumer-debt categories fell or were flat.

By design federal student loans are easy for almost anyone to get.

Nearly all student loans—93% of them last year—are made directly by the government, which asks little or nothing about borrowers’ ability to repay, or about what sort of education they intend to pursue.

President Barack Obama championed easy-to-get loans during the campaign, calling higher education “an economic imperative in the 21st century.” A spokesman for Education Secretary Arne Duncan said the goal is “to make student loans available to as many people as possible,” and requiring minimum credit scores would block many Americans from going to college….

… the government demands no collateral and has no underwriting requirements….

… “The way the system works now…put money on the stump, people come and get it,” said Anthony Carnevale, director of Georgetown University’s Center on Education and the Workforce. “Can’t blame them. It’s sitting out there in plain view. It’s easy to get.”

Jackson Toby, a retired Rutgers professor and adjunct scholar at the American Enterprise Institute, recommends reforms that would make student loan lending standards similar to those of other consumer debt.  This change would exclude many lower-income students.

He proposes that students undergo a comprehensive assessment of credit-worthiness, including how much debt they currently have, their academic history and their expected income upon graduation, given their major, before getting federal student loans.

Imposing tougher standards would exclude some potential borrowers. “You would have loans only going to upper-income students at the best colleges,” said Mark Kantrowitz, who publishes Finaid.org, a student-aid website.

Other charts among the WSJ’s top picks cover the changes in categories of consumer spending over the last century, how unemployment benefits differ among the different states, and how deficit spending has become the norm in recent years.

Related:  Did the student loan bubble just burst? (costofcollege.wordpress.com)

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3 Comments to “College debt levels higher than all other types of consumer loans”

  1. The long-held belief that college loans are “good debt”, for the reason you mentioned, has been eroded by the experience of so many who have found themselves burdened by student debt that has not paid off. I don’t think college is always automatically a better reason for debt than a car, to use one example.

    If you think Toby’s idea is dumb, then you probably would support continuing to loan money to a student with a 1200 SAT and 2.0 GPA who plans to major in art history and who must take remedial courses during his first semester. I support more rigorous underwriting for federal student loans.

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  2. We don’t know the details behind what “credit-worthiness” means, but the article specifically references “how much debt they currently have, their academic history and their expected income upon graduation, given their major, before getting federal student loans”. I’m fine with that, but I would concede that we don’t fully know what Toby’s idea entails. While his general concept would likely hurt lower-income students, our present system of promoting easy-to-get loans to both students and parents certainly has its own problems.

    One problem I’ve read about recently regarding employers subsidizing training is that with the low level of loyalty these days, going in both directions between employers and employees, it makes no economic sense for employers to spend too much money on training employees who have no qualms about quickly taking that training to the next job where a big fat bonus is part of the deal. The fact is we value the flexibility to change jobs, and while the idea of “lifetime” employment is nostalgic, I doubt most Americans really want to go back to that.

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  3. I think standardized tests should be a big component for determining loan eligibility. Grades can be too easily manipulated to be consistently meaningful.

    In some sectors, industry associations commonly offer training, often at nominal cost to employees. But I don’t think it’s common to have a formal procedure that allows contributing employers to get first crack at the graduates. Actually, I think that would be hard to set up. Employees will simply go to where they see the best opportunities for themselves.

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