Could rising student loan debt lead to the next crisis?
Student debt has increased sevenfold since 1999, ballooning to an astounding $550 billion. (Getty Images)
By STEPHEN KEPPEL
Channel: Education Week, Economics
A recent article in the Financial Times raises some new worries about US student loans. Rising student debt and the difficult job market could lead to an increase in defaults and delinquencies.
From the FT:
Student debt has increased nearly sevenfold from $80bn in 1999 to $550bn at the end of June 2011, according to the Federal Reserve Bank of New York. Other estimates from the Department of Education put outstanding student loans as high as $805bn.
But the unemployment rate for 20- to 24-year-olds is nearly 15 per cent – higher than the overall 9.1 per cent rate – compromising the ability of graduates to pay off their growing debts.
As many universities are cutting back on spending (and student aid), students are making up the cost and taking on more debt.
From the FT:
Alberto Gutierrez, a 38-year-old doctoral student at the University of California, Los Angeles, has had to borrow more money and take on a part-time job to cover his expenses, including a $3,000 monthly mortgage payment. He receives some financial aid, but not as much as he had hoped. “It’s a public university so they’ve been cut a lot. Resources are pretty slim,” he said.
To tide him over, Mr Gutierrez borrowed another $10,000. “I’m going to be about $25,000 in debt when I finish. I’ve never owed that much money.”
Student loan delinquencies are increasing and the rise of the weakly regulated for-profit college industry is causing concern.
Debt default rates are higher for students that attend for-profit colleges. According to the Department of Education, one in five students at for-profit colleges default on their student loans within three years of entering repayment.
Despite the worry, the current situation of student loans is different from the subprime mortgages which led to the last financial crisis.
From the FT:
“I don’t think it’s a subprime crisis in the making,” said Mark Zandi, chief economist at Moody’s Analytics. But he added there would be higher delinquency and loss rates on loans as graduates faced a difficult economic environment. “Student loans have historically had credit issues and it’s going to get worse.”
Students are still feeling the crunch. A campaign to forgive student loan debt has attracted the attention of activist sites such as MoveOn.org and the Occupy Wall Street protestors. As of late September a petition to Forgive Student Loan Debt as a Means of Economic Stimulus had received “nearly 400,000 signatures”, according to Rob Applebaum, Founder of ForgiveStudentLoanDebt.com.
From the FT:
Ani Monteleone, who graduated from the Oregon College of Art and Craft in 2006, carried a sign calling for student debt relief at an October 5 march on Wall Street. She said monthly loan payments were a burden for graduates who were already struggling to pay their bills and find a job. “They bailed out the banks. Why can’t they bail out the people?” she asked.
