Unemployed_Northeastern•3 days ago−
"Compared to cars and houses, higher education is a much safer investment."
It's funny that this assertation has no citing authorities behind it. Here are some:
Percent of mortgages in delinquency in September 2009, at the height of the crash: 14% https://en.wikipedia.org/wiki/..., under the "Mortgage Market" section. The peak subprime mortgage delinquency rate appears to be about 25%. Ibid.
Percent of student loans in repayment that are currently delinquent: 31%, according to http://newyorkfed.org/newseven..., page 13. And mind you, barely half of outstanding student loans (56%) are in repayment. The rest are in forbearance or deferral, which generally stem from being back in school or unable to make payments.
So student loans currently have a delinquency rate more than twice as high as the mortgage delinquency rate during the apex of the housing crash.
Is it a bubble? Well, let's look at some figures:
2000: Total outstanding student loan debt: about $200 billion
2008: Total outstanding student loan debt: about $450 billion
2013: Total outstanding student loan debt: between $1 trillion and $1.125 trillion, depending on the estimate and whether private student loans are included
Punch those numbers into a graph and see what kind of growth it represents. Hint: it rhymes with flexponential.
OK, but how about granulated data?
Well, according to the NY Fed Reserve again (page 9 of the above citation), both the number of student debtors and their average balance increased 70% between 2004 and 2012. While I don't have an identical data timeline for wages, I can say that that from 2000 through 2012, salaries for college graduates 25 and under dropped 8.5% http://www.epi.org/publication.... And we already know about the growth in student loan debt from 2000 through today. Its growth has outstripped everything in America, including health care costs. Meanwhile, if we look at the epi study closely, we can see that the real hourly wages of young college graduates has only increased by about one dollar from 1989 through 2012. If we look at http://stateofworkingamerica.o..., we can see that the real entry-level wages of college graduates have only increased about 10% for men and 15% for women since... 1973.
Is it a safe investment?
According to Pew, only 42% of college graduates held college-level jobs, on average, from 2003 through 2011. Nearly that same percentage were unemployed, working in high-school level jobs, or out of the workforce. Similar outcomes have been reported in labor studies out of Rutgers and Northeastern. Every graduate discipline and professional school, save for medical school and graduate engineering and comp sci programs, are in open crisis. That does not resemble an investment; it resembles a gamble; a bet of red or black on the roulette wheel.
Oh, and here are some things that apply to mortgage debts but NOT to student loans: bankruptcy protections, the Truth in Lending Act, the FDCPA, state consumer protection laws, and the statute of limitations.
Is it a safe investment FOR INVESTORS?
Yes: "SLABS [Student Loan Asset-Backed Securities, were are comprised of private and FFELP loans] were invented by then-semi-public Sallie Mae in the early ’90s, and their trading grew as part of the larger asset-backed security wave that peaked in 2007. In 1990, there were $75.6 million of these securities in circulation; at their apex, the total stood at $2.67 trillion. The number of SLABS traded on the market grew from $200,000 in 1991 to near $250 billion by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50 percent or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments—the kind financial advisors market to pension funds and the elderly....
Under the just-ended Federal Family Education Loan Program (FFELP), the US Treasury backed private loans to college students. This meant that even if the secondary market collapsed and there were an anomalous wave of defaults, the federal government had already built a lender bailout into the law. And if that weren’t enough, in May 2008 President Bush signed the Ensuring Continued Access to Student Loans Act, which authorized the Department of Education to purchase FFELP loans outright if secondary demand dipped. In 2010, as a cost-offset attached to health reform legislation, President Obama ended the FFELP, but not before it had grown to a $60 billion-a-year operation." Malcom Harris, http://nplusonemag.com/bad-edu.... One might also note that the two best years for SLABS were 2006 and 2007, right after private student loans were mysteriously and retroactively rendered nondischargeable in bankruptcy in 2005. What a strange coincidence, right?
Not that is entirely germane to the discussion, but the erstwhile, long-time CEO of Sallie lives on a 250 acre estate outside of Washington DC on which he put a private 18-hole golf course. Not a private club, mind you - he built an entire golf-course in his DC-area backyard. That's the kind of wealth student loans made for the for-profit lenders.
Is it a safe investment FOR THE GOVERNMENT?
Yes. Based on whose accounting methods you believe, the Department of Education will reap between 5% and 20% profit on each year's batch of lending, over those loans' repayment periods. This is primarily due to the DOE's ability to borrow at ~1% and lend out at 6.8% to 7.9%. Even on defaulted federal student loans, the government averages about 95 cents on the dollar AFTER collection costs, and about $1.20 before collection costs. Yes, you read that correctly.
Will new income-based repayment plans help?
Yes and no. While putatively keeping under-earning graduates out of default, IBR and PAYE accomplish little else. Interest continues to accrue and principalize on the underlying balances, which can lead to negative amortization (i.e. the balance grows after each payment). It wreaks havoc on one's credit score and ability to secure a mortgage or car loan. It removes whatever speck of tuition restraint higher ed had left (law schools are openly touting IBR/PAYE as reason not to care what they charge anymore). There is no guarantee these extremely expensive programs won't be cut under future austerity measures. And under current law, balances forgiven after the end of the 25/20 year periods are counted as realized income by the IRS and treated accordingly. These plans, then, are just longer, brutal versions of Chapter 13 repayment plans.
So, student loans really aren't like other loans, are they?
No. Over the years, as Congress removed preexisting all of the aforementioned consumer protections from student loans, their treatment began to resemble overdue tax bills or child support more than ordinary consumer debts. We give the most dangerous, anti-consumer debt instruments allowed under the law to the youngest, most financially naive members of adult society, after telling them it is "good debt" and an "investment in themselves."
Have policy makers known about this for awhile?
Yes. With some digging in your closest library, you can find such gems as:
- The 1986 book "Mortgaged Futures" by Marguerite Dennis
- A 1987 College Board report entitled: "Student Loans: Are They Overburdening a Generation?"
- A 1991 report by the National Commission on Responsibilities called "Making College Affordable Again"
So why hasn't anything been done?
It's complicated, but in short: everyone makes money off the system, as I outlined above. In addition to the lenders, investors, and government, universities received about $125 billion in student loans last year, as compared to about $30 billion in gifts - and it was nearly a record year for gifts. Student lending gives states the ability to radically defund their public universities without having quality suffer (at least facially). There has long been a revolving door between the Department of Education and the for-profit student lenders. And the largest higher education think tank in America, the Lumina Foundation, with its $1.5 billion warchest, was cofounded by two student loan companies and funded by Sallie Mae. Its public goal is to have 60% of Americans sport college degrees by 2025, up from roughly 31% today. Note how that would produce 15 years of growth for Sallie, who still lends, creates and sells SLABS, and administers and collects on federal loans on behalf of the DOE.
Is it going to get worse?
Yes. Entry-level hiring has been thoroughly gutted by the economy, the unpaid internship, outsourcing, and the presence of an increasingly desperate lateral market. Supplies of college graduates are set to become even more unwieldy, as the DOE has approved federal student lending for online, competency-based education, and the monetization of MOOCs is all but inevitable. See any number of stories on the Chronicle of Higher Education or Inside Higher Ed for more on these topics.
Look, I get that the Atlantic is pro-education. It makes sense. It's a magazine founded by the 19th century's leading intellectuals: Emerson, Longfellow, Alcott, Holmes Sr., Lowell, etc. Just about every staff writer went to Harvard or Princeton or similar, and no doubt your entire circle of friends works at Goldman Sachs or the State Department or IBM. Given the insane degree of illegal unpaid internships in NYC that journalists now have to go through, I would wager that most of the Atlantic's staff hails from the upper bounds of the family income scale. But you folk are outliers. Even if one were to embark on as slight an educational "downgrade" from Harvard to BC or Princeton to Rutgers or Yale to Conn College, they would find themselves in the midst of massacre - and we are still talking about extremely excellent schools. Once we get down to Open Enrollment State or Bogus-Veblen-Good-University or Federal-Loan-Trough-For-Profit, well, what's left to say?
I can appreciate that you are trying to spin already-historic lows for home ownership, family formation, and consumer spending for the 25-34 cohort as a good thing. Furthermore, this site, like Slate and some others, likes to publish articles with a "This is what is really happening with XYZ, despite all the headlines to the contrary." But you are way off-base with the future of higher education. Look to the handwringing and clenched fists of the people who work in higher ed and write over on the Chronicle or Inside Higher Ed. Only disaster awaits.