Archive for ‘student loans’

February 26, 2015

Student loan defaults are the only type that continue to rise

by Grace

Americans are having more trouble paying off their student loans than their mortgages or any other type of debt.

As student debt balances continue to grow . . .

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. . .  student loan defaults have overtaken those for all other types of debt.

20150224.COCStudentLoanDefaultTenYearGrowth2

America’s total student loan debt is now nearly $1.2 trillion. One reason the burden is difficult to pay off, Fed researchers wrote: “Student debt is not dischargeable in bankruptcy like other types of debt … Delinquent or defaulted student loans can stagnate on borrowers’ credit reports.”

The number of student borrowers almost doubled over ten years.

The surge is fueled by more people borrowing — and borrowing larger amounts. The number of borrowers rose 92 percent between 2004 and 2014, according to the Fed researchers. The average student loan balance grew 74 percent.

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Danielle Paquette, “Americans are having more trouble paying off their student debt than their houses”, Washington Post, February 19, 2015.

February 25, 2015

Are we seeing a ‘big quasi-bailout’ for student loan borrowers?

by Grace

The Obama administration projects that the increased use of student loan forgiveness programs will cost taxpayers $22 billion next year.

… Primarily because of the recent growth in enrollment in the program, projected long-term revenues from the federal direct student loan portfolio were reduced by almost $22 billion compared with the best guess from the previous year….

This looks like ‘a big quasi-bailout’

That’s a big quasi-bailout, increasing the deficit nearly 5 percent. The White House budget office was unaware of any larger re-estimates since the current scoring rules for credit programs went into effect in 1992. As a January Politico Magazine feature on the government’s unusual credit portfolio reported, the Federal Housing Administration has stuck more than $75 billion worth of similar re-estimates onto Uncle Sam’s tab over the last two decades, most of them after the recent housing bust led to a cascade of FHA-backed mortgage defaults. But it’s never had a one-year shortfall quite as drastic as this.

Borrowers are made out to be innocent victims of “circumstances beyond their control”.

Regardless of which accounting method is used, the federal government is expecting to write off billions of dollars in future student loan balances under the program in order to reward public service employment and protect borrowers from economic circumstances beyond their control.

It’s not as if a student loan bailout should come as a surprise.  Here’s a question from 2011.

Is a student loan bailout inevitable?

20110913.COCCollegeLoanGrowth

Seeing the trend lines, Mark Gimein wrote this four years ago.

Eventually both private lenders and the government will be on the hook. The government has already moved to ease some loan terms. It will need to find more, especially for those snookered into paying for degrees worthless in the job market. The private loans, meanwhile, will simply blow up. We may as well start figuring now how graduates, taxpayers, lenders, and schools will split the bill.

Taxpayers just took on $22 billion, and there’s probably more to come.

Related:  “Politicized federal student loan program bails out ‘deadbeats’”

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Kevin Carey, “Flip Side of Reducing Student Debt Is Increasing the Federal Deficit”, New York Times, February 10, 2015.

Michael Grunwald, “The College Loan Bombshell Hidden in the Budget”, Politico,  February 05, 2015.

February 23, 2015

Student loan defaults are most common among those with lowest balances

by Grace

It’s borrowers with the smallest balances that are most likely to default on their student loans.

20150220.COCStudentLoanDefaultByLoanBalance1

College dropouts are more likely to default.

… One likely explanation, offered by the New York Fed researchers, is that many Americans with small loan balances are dropouts. They may have attended school for a semester or two without getting a degree. They often don’t end up with the decent-paying job that a college education is supposed to bring, and thus lack the income to repay their debt.

Another possibility is that low-balance borrowers attained credentials such as certificates that don’t lead to the kind of jobs and salaries that a bachelor’s degree does.

A larger loan balance usually indicates a graduate degree, a credential that generally correlates with a higher salary.

By contrast, many borrowers with large loan balances are people who graduated from master’s programs and professional schools—doctors, lawyers—who typically end up with generous salaries. (We said typical, not always. There are plenty of struggling lawyers.)

High earners disproportionately take advantage of income-based repayment programs that shift part of their loan burden to taxpayers.

So while they have the biggest debts, they’re getting the actual returns on their investment and thus are in position to repay their loans. They also may be the most likely to enroll in income-based repayment programs, which many academics say disproportionately benefit high earners.

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Josh Mitchell, “Who’s Most Likely to Default on Student Loans?”, Wall Street Journal, Feb 19, 2015.

February 11, 2015

‘master’s degree is the fastest-growing college credential’

by Grace

Master’s degrees are “as common now as bachelor’s degrees were in the 1960s”.

More than 16 million people in the US — about 8 percent of the population — now have a master’s, a 43 percent increase since 2002.

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Forty years ago education was far and away the most popular major for a master’s degree, but today business has taken that spot.

20150209.COC1971PopularMasters  20150209.COC2012PopularMasters

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Are graduate programs exacerbating the student debt problem?

… The typical total debt for a borrower with an undergraduate and graduate degree is now more than $57,000, up from $40,200 in 2004. (This includes medical and law degrees.)

40% of all student debt comes from graduate degree programs,“even though graduate borrowers make up only 17 percent of all borrowers”.

Expanded loan forgiveness programs are “tailor-made for graduate students”.

Students who took out big loans for graduate school and those with higher incomes stand the most to gain financially under President Obama’s expansion of the federal government’s loan forgiveness program.

Lawyers, doctors and other highly trained professionals who utilized federal loans throughout their post-high school education could walk away with most or all of their graduate school debt forgiven by the federal government under the program, say experts.

Graduate students usually get their money’s worth.

… Almost regardless of undergraduate major, a graduate degree boosts earning power even further, according to the Georgetown Center on Education and the Workforce.

But does this proliferation of master’s degrees produce wasteful credential inflation?

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Libby Nelson, “Master’s degrees are as common now as bachelor’s degrees were in the ’60s”, Vox, February 7, 2015.

Susan Ferrecho, “The surprising winners of Obama’s student-loan program”, Washington Examiner, June 12, 2014.

January 21, 2015

Another reason to avoid student loans

by Grace

Level of student debt burden, not choice of school, is the biggest predictor of a college graduate’s well-being.

Last year Gallup surveyed over 30,000 college graduates to learn how well they were doing.

For the most part, the type of school has little correlation with well-being.

… It asked graduates how they were doing across five different metrics, including financially, physically and socially. Eleven percent of graduates of public universities and private universities said they were “thriving” across all five. Twelve percent of graduates of U.S. News & World Report’s top 100 schools were thriving, essentially the same as the rest.

20140120.COCWellBeingTypeSchool2

But student loans can cripple well-being.

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The biggest predictor of whether a graduate wasn’t thriving was whether he or she had student loans. Fourteen percent of those without any debt said they were thriving, compared to 2 percent of those with more than $40,000 of debt. You can’t draw iron-clad conclusions from that, but those figures should be worrisome all the same for anyone thinking about taking on student loans.

Takeaway lessons:  Going into debt to attend your “dream” school may be detrimental to your well-being.  Private school may not be worth the extra money.

ADDED:

These are the five elements of well-being that were measured in the Gallup survey:

Purpose Well-Being: Liking what you do each day and being motivated to achieve your goals

Social Well-Being: Having strong and supportive relationships and love in your life

Financial Well-Being: Effectively managing your economic life to reduce stress and increase security

Community Well-Being: The sense of engagement you have with the areas where you live,

liking where you live, and feeling safe and having pride in your community

Physical Well-Being: Having good health and enough energy to get things done on a daily basis

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Max Ehrenfreund, “Private colleges are a waste of money for white, middle class kids”, Washington Post, December 18, 2014.

January 20, 2015

Student loan forgiveness is rising, with taxpayers paying the tab

by Grace

More student loan borrowers are getting a break as taxpayers take over repayment of their debt.  The administration’s policy on this matter is described by the Wall Street Journal:

First encourage more student debt, then promote nonpayment.

One of the slow-rolling and under-reported government debacles is the rising amount of student-loan debt that is guaranteed by taxpayers and will never be repaid. Thanks to the federal takeover of the student-loan market in 2010, the Education Department now stands behind more than $1 trillion in outstanding debt. Less well known is how the same federal government that has promoted and subsidized this debt is also scheming to make sure it doesn’t have to be repaid.

Income-based repayment programs are one way for borrowers to shift responsibility over to taxpayers.

So-called income-based repayment programs reduce a borrower’s monthly payments and then forgive the remaining principal after a period of years. Graduates who choose the nonprofit and government jobs favored by the President can have their loans forgiven entirely after 10 years.

Participation in expanded government debt relief plans has doubled over the last year.

The Obama administration greatly expanded benefits under income-based repayment plans in recent years and has launched efforts to promote them. Enrollments are growing rapidly and now stand at an all-time high. Some 24% of Federal Direct Loan Program balances ($115 billion) that have come due are enrolled in the two most generous plans, Income-Based Repayment and Pay As You Earn. That is up from 14% a little more than a year ago. The number of borrowers using the plans has doubled over that time, to 2.2 million.

At the same time, default rates are trending upward.  This at a time when the economy is supposedly improving.

Student loans are promoted for everyone, regardless of qualifications.  And loans are being made easier “not to repay”.

This all makes sense, however, when you realize that the student-loan program has been designed to achieve two political goals: Loans should be available to any student, at any school, pursuing any credential; and student debt is bad and burdensome, so it should be easy for borrowers not to repay.

Based on these goals, the program is performing quite well for students and the institutions whose coffers swell under such loose lending standards. Loan issuance has grown rapidly in recent years while repayment rates have declined steadily. From the perspective of the taxpayers who must ultimately finance these liabilities, however, the federal student-loan program is performing badly and steadily getting worse.

Here is another prediction that IBR schemes “will dramatically increase in 2015″.

Use and availability of income-based repayment (IBR) schemes, which set repayment expectations at a set percentage of the student borrower’s post-college income, will dramatically increase in 2015. This is because policymakers have narrowly defined the student debt problem as a problem of student borrowers struggling to keep up with payments (i.e., avoid default). Therefore, setting payments at a more affordable level would seem to resolve the problems student debt creates….

William Elliott III
Founding Director of the Assets and Education Initiative at the University of Kansas, School of Social Welfare and an expert on student debt

Meanwhile in New York, Gov. Andrew M. Cuomo will propose new legislation to forgive the student debt of thousands of college graduates.

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“Your Taxpayer Tuition Bill”, Wall Street Journal, Dec. 30, 2014.

Jason Delisle, “The Hidden Student-Debt Bomb”, Wall Street Journal, Dec. 30, 2014.

NPR Ed Team, “Kindergarten Entry Tests And More Education Predictions for 2015″, NPR, Jan. 3, 2015.

Kate Taylor, “Cuomo to Offer Plan to Cut College Graduates’ Debt”, New York Times, Jan. 3, 2015.

January 6, 2015

Federal student loans continue to grow

by Grace

Federal student loans have climbed sharply every year since 2007.

20150102.COCFEDERAL STUDENT LOAN DEBT-HISTORICAL-CHART-1

From November 2013 through November 2014, the aggregate balance in the federal direct student loan program–as reported by the Monthly Treasury Statement–rose from $687,149,000,000 to $806,561,000,000, a one-year jump of $119,412,000,000.

The balance on all student loans, including those from private sources, exceeded a trillion dollars as of the end of the third quarter, according to the Federal Reserve Bank of New York.

The steep rise starting in 2010 can be partly explained by the elimination of the Federal Family Education Loan (FFEL) program, which allowed private lenders to make federally guaranteed student loans.

In 2010, Congress passed and the President signed into law a bill that eliminated the FFEL program for all new loans made as of July 1, 2010. All federal student loans have been made under the Direct Loan program as of that date….

The federal government now “essentially serves as the banker — it provides the loans to students and their families using federal capital (i.e., funds from the U.S. Treasury), and it owns the loans,.

Wealth transfer from taxpayers to colleges and students

The federal student loan program serves as a transfer of wealth to colleges and universities.  Rich schools like Harvard enjoy rising endowments while their students receive federal loans.

By doling out a net average of about $100 billion per year in student loans, the federal government allows even the nation’s wealthiest universities to charge students more than they and their families can pay without going into debt.

That makes colleges richer and students poorer.

Students benefit from taxpayer-funded loan forgiveness programs.

“Currently, over 50 loan forgiveness and loan repayment programs are authorized, and at least 30 of which were operational as of October 1, 2013,” says CRS.

When the government forgives or repays a student loan, it becomes a redistribution of wealth from taxpayers to a person who attended college.

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Terence P. Jeffrey, “Federal Student Loan Debt Tops $800 Billion”, CNS News, December 31, 2014.

January 2, 2015

This college guarantees graduates will get good-paying jobs

by Grace

20141230.COCAdrianCollege1Adrian College in Michigan will guarantee jobs for all its graduates.

… A new program guaranteeing every graduate would make more than $37,000, or get some or all student loans reimbursed.

It costs the college $1,165 per student to pay for this guarantee.

Adrian paid roughly $575,000 this year, or $1,165 per student, to take out policies on 495 students. For those who graduate and get a job that pays less than $20,000 a year, the college will make full monthly student loan payments until they make $37,000 a year. With a job that pays $20,000 to $37,000, the college makes payments on a sliding scale.

There’s no time limit for the payment plan but the college caps total loan payments at $70,000 per student. Adrian’s annual cost of tuition, room and board is about $40,000 before any forms of financial aid.

Let’s wait to see how this works out.

I suspect very few graduates will be able to prove their inability to get a job paying at least $20,000 annually.  Beyond that, the details could get murky.  Some graduates will benefit by gaining greater flexibility in the types of jobs they accept, but the fact is that many college graduates are finding it difficult to find jobs paying at least $37,000.  I wonder if one of the stipulations is graduation within four years.  That could rule out many prospective beneficiaries.

This guarantee does offer Adrian College good publicity now, but I will be interested to hear about the results of this scheme in four years.

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“Small college rolls out loan reimbursment program”, CNBC, Dec. 26, 2014.

December 30, 2014

How will the new federal college rating system affect higher education?

by Grace

Beginning next year, colleges and universities will be judged on three broad criteria when it comes to meting out federal financial aid: access, affordability and student outcomes, according to a new “framework” released by the Education Department.

Public input on the new framework will be accepted until February 17.

Schools could be rated on a sliding scale, from “high performers” to “in the middle” to “low performers,” based on such indicators as whether they meet a certain average net price, graduation and student loan repayment rates, and whether graduates get a job in the field they studied.

Measuring employment outcomes can be complicated.

One of the most controversial ideas that’s been debated is some kind of jobs measure. This framework includes two different examples: What percentage of students have a job, say, six months after graduation? And what are their median earnings long-term?

The administration says it will collect and present this labor market information in a way that is “sensitive to educational, career, work force and other variables.” In other words, a divinity school won’t be dinged because its graduates are pastors with low salaries.

Two other possibilities on the list for outcomes are grad-school attendance rates, and loan-repayment rates. That last metric has already been put into place as the “gainful employment rule” for for-profit colleges, which are suing to stop it.

What are the chances that once the metrics are in place, schools will try to find ways to game the system?  For example, will they push students to enroll in graduate school so they can be put into the “successful outcome” category?  Will standards for graduation decline?

Related:  ‘Gainful employment rules are applied unequally to colleges’

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Scott Neuman, “Education Dept. Issues Framework For New College Rating System”, NPR, December 19, 2014.

Anya Kamentz, “New Federal College Ratings Will Consider Aid, Total Cost, Employment”, NPR, December 19, 2014.

December 23, 2014

A Marshall Plan for higher education?

by Grace

In consideration of “the sky-high unemployment rate of recent graduates” and soaring student debt levels fueld by clueless students, Victor Davis Hanson proposes a Marshall Plan for higher education.

… There should be a Marshall Plan on campuses to advise and help students in their second and third years about post-graduate employment. Financial counselors should warn students when their tuition debt reaches unsustainable levels. One would think university counselors early on would mandate consultations with students on job preparation, faculty would mentor students about job opportunities, and in general the employment rates of recent graduates would be well-publicized. What sort of business hikes its charges while lowering the quality of its product? Answer: one that is subsidized by the government.

Whoa!  If expansive government intervention is considered detrimental, then a Marshall Plan seems like overkill as an attempt to help solve today’s problems in higher education.  Although the Marshall Plan may be favorably viewed by most people, a credible counter argument is that its sterling reputation is in fact “a modern myth”.

… there is no convincing evidence that the Marshall Plan caused Europe’s growth. For instance, U.S. assistance never exceeded 5% of the GDP of the recipient nations. As Cowen points out, “The assistance totals were minuscule compared to the growth that occurred in the 1950s.”

Moreover, receipt of aid did not track with economic recovery. France, Germany and Italy began to grow before the onset of the Marshall Plan, while Austria and Greece expanded slowly until near the program’s end. Great Britain, the largest aid recipient, performed most poorly.

Far more important for Europe’s growth was policy reform….

The Marshall Plan may have been a generous act, but that doesn’t mean it spurred Europe’s recovery. The real lesson of the Marshall Plan is that entrepreneurial culture, legal stability and free markets are necessary for economic success. Liberty, not money, is the key to prosperity.

In which case the better solution may be for the government to take a smaller role in helping finance college.  Maybe growing subsidies are actually hurting the low-income students they are intended to help.

It’s not just that many colleges and universities are bleeding taxpayers. The government’s overall strategy to subsidize higher education is failing at its core task: providing less privileged Americans with a real shot at a college degree. Alarmingly, it is burdening low-income students with risks they cannot bear and steering them into low-quality educations.

A Marshall Plan initiative for today’s college woes could easily become a bureaucratic, costly fiasco with unintended consequences that cause more harm than good.

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Victor Davis Hanson, “The Campus as California”, PJ Media, December 14, 2014.

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