The Student Loan Default Rate Is Way Worse Than You Think

The Wall Street Journal’s Josh Mitchell recently authored an article in which he calls attention to the roughly 16% student loan debt default rate, as measured in terms of number of borrowers.

That data point, by itself, is extraordinarily high. In proper context, it’s calamitous.

At $125 billion in aggregate value, these defaulted loans represent roughly 10% of all student loans that are currently outstanding — and roughly 13% of those that are government-guaranteed. Yet only about half these debts are actually in repayment (because the other half represents deferred borrowings for students who are still in school). As such, that 10% (or 13%) is really closer to 20% (or 26%).

That’s nearly double the default rate for single-family mortgages at its height, in the aftermath of the 2008 economic collapse. Here too, though, that metric is also misleading.

For all other forms of consumer debt — commercial debts as well, for that matter — defaults are measured on contracts where the payments are 91 or more days past due. Only within the unique alternative universe of government-backed student loans are defaults measured at 270 or more days.

Therefore, if the Federal Reserve Bank of New York is correct at noting in its most recent Quarterly Report on Household Debt and Credit that seriously delinquent student loans (more than 90 days past due) represent 11% of all outstanding education debts, and if that metric excludes loans that have already been declared to be in default, the most accurate default rate lies somewhere between 40% and 50%.

Hence my use of the word calamitous.

Would Free College Tuition Solve the Problem?

With all due respect to both Secretary Hillary Clinton and Sen. Bernie Sanders, the notion of free tuition for higher education does nothing for those who are already encumbered.

All these debts — without regard for origination channel (public vs. private) and payment status (current vs. past-due) — should be restructured so that:

  • Installment payments are made over 20 years instead of 10
  • The interest rate represents the true breakeven point for the government
  • Borrowers have the option to accelerate repayment without penalty

Even if lawmakers decide to reduce the 20-year restructure term by subtracting twice the number of months that have been paid to date, the net effect on all borrowers will be significant.

It’s the difference between debts that are more likely to be repaid than not, major consumer purchases that are more likely to be undertaken than not, and a taxpayer-funded bailout that would otherwise be more likely than not.

As for all the free tuition rhetoric? According to a recent Princeton Survey Research Associates report, 62% of those surveyed love the idea, although nearly half are unwilling to cough up the money (in the form of higher taxes) to pay for it.

Therefore, the only way to make this ideal a reality is to attack the cost side of the equation.

We can start by encouraging institutional consolidations to eliminate operational redundancies, eliminating tax breaks for endowment funds and requiring that the income these investment funds generate are used to offset the price of tuition.

At that point, not only will we have addressed the problem that exists today, but we will have also taken steps to help ensure against its recurrence.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: Lorraine Boogich

The post The Student Loan Default Rate Is Way Worse Than You Think appeared first on Credit.com.

The Student Loan Default Rate Is Way Worse Than You Think

The Wall Street Journal’s Josh Mitchell recently authored an article in which he calls attention to the roughly 16% student loan debt default rate, as measured in terms of number of borrowers.

That data point, by itself, is extraordinarily high. In proper context, it’s calamitous.

At $125 billion in aggregate value, these defaulted loans represent roughly 10% of all student loans that are currently outstanding — and roughly 13% of those that are government-guaranteed. Yet only about half these debts are actually in repayment (because the other half represents deferred borrowings for students who are still in school). As such, that 10% (or 13%) is really closer to 20% (or 26%).

That’s nearly double the default rate for single-family mortgages at its height, in the aftermath of the 2008 economic collapse. Here too, though, that metric is also misleading.

For all other forms of consumer debt — commercial debts as well, for that matter — defaults are measured on contracts where the payments are 91 or more days past due. Only within the unique alternative universe of government-backed student loans are defaults measured at 270 or more days.

Therefore, if the Federal Reserve Bank of New York is correct at noting in its most recent Quarterly Report on Household Debt and Credit that seriously delinquent student loans (more than 90 days past due) represent 11% of all outstanding education debts, and if that metric excludes loans that have already been declared to be in default, the most accurate default rate lies somewhere between 40% and 50%.

Hence my use of the word calamitous.

Would Free College Tuition Solve the Problem?

With all due respect to both Secretary Hillary Clinton and Sen. Bernie Sanders, the notion of free tuition for higher education does nothing for those who are already encumbered.

All these debts — without regard for origination channel (public vs. private) and payment status (current vs. past-due) — should be restructured so that:

  • Installment payments are made over 20 years instead of 10
  • The interest rate represents the true breakeven point for the government
  • Borrowers have the option to accelerate repayment without penalty

Even if lawmakers decide to reduce the 20-year restructure term by subtracting twice the number of months that have been paid to date, the net effect on all borrowers will be significant.

It’s the difference between debts that are more likely to be repaid than not, major consumer purchases that are more likely to be undertaken than not, and a taxpayer-funded bailout that would otherwise be more likely than not.

As for all the free tuition rhetoric? According to a recent Princeton Survey Research Associates report, 62% of those surveyed love the idea, although nearly half are unwilling to cough up the money (in the form of higher taxes) to pay for it.

Therefore, the only way to make this ideal a reality is to attack the cost side of the equation.

We can start by encouraging institutional consolidations to eliminate operational redundancies, eliminating tax breaks for endowment funds and requiring that the income these investment funds generate are used to offset the price of tuition.

At that point, not only will we have addressed the problem that exists today, but we will have also taken steps to help ensure against its recurrence.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: Lorraine Boogich

The post The Student Loan Default Rate Is Way Worse Than You Think appeared first on Credit.com.

It’s Time We Got Serious About Solving the Higher Education Problem

college_grads

Does the Brookings Institution have a problem with the issue of higher education reform?

A colleague asked me that after reading the email that we both received from the Center on Children and Families at Brookings with the subject line, “Sanders’ Free College Proposal Would Help the Rich More Than the Poor, New Brookings Research Finds.”

According to its latest Evidence Speaks Series report, Brookings contributor and Urban Institute Senior Fellow Matthew M. Chingos contends that Senator Bernie Sanders’s  disproportionately benefit students from higher-income households and leave those at the opposite end of the economic spectrum with non-tuition-related expenses of potentially greater value.

Chingos’ argument hinges, in part, on the notion that students from higher-income households “tend to attend more expensive institutions.” What’s unclear is whether he means that students from affluent families typically attend more expensive in-state public colleges and universities, or out-of-state institutions, which typically charge higher prices to nonresidents. Given that disparity, one would think that the intent of the Sanders proposal is to promote in-state attendance, although that too is unclear.

Chingos also acknowledges that his study “does not consider the distributional implications of the revenue side of the free college proposals, such as Sanders’s proposed tax increase targeted at affluent families.” In other words, his analysis does not to take into account the offsetting financial impact of the higher taxes these same households would end up paying to fund the Sanders plan, which suggests a premeditated conclusion — and the reason for my colleague’s uncertainty.

The concept of free tuition for higher education isn’t novel. Germany, for example, put it into place on a national level a couple of years ago. But unlike the free-wheeling system in the U.S., admission standards at German schools are more rigorous, and students must cover their personal expenses. Many make that work by attending schools that are close to home and taking part-time jobs to pay the bills.

If we decide to prioritize tertiary education by funding it through the federal budgetary process — as many countries now do — wouldn’t it make sense to first determine a fair market price (FMP) for the two- and four-year degrees that our system churns out?

For example, according to the College Board’s Annual Survey of Colleges, average in-state tuition and fees for the 2014 to 2015 school year totaled $9,139. (Out-of-state residents paid $22,958, if that is what Chingos means by “more expensive institutions.”) As for the in- versus out-of-state mix, nonresidents account for as much as 30% at certain high-profile schools.

Perhaps this can serve as a reasonable proxy for a FMP.

If so, then given that the federal government spends upwards of $160 billion a year on its various higher education-related programs on behalf of the 20 million who currently attend college, nearly sufficient funding already exists to cover everyone’s higher education costs.

Consider the impact on the higher education marketplace if that were to come to pass. Schools with high operating costs would have no choice but to do what they should already be doing:

  • Seeking out other schools with which to combine for the sake of reducing aggregate administrative costs.
  • Exiting non-education-related businesses that distract from the core mission of efficiently and effectively delivering high-quality higher education.
  • Bolstering the capital account that will be needed to pay for all that by divesting the infrastructural trappings that are associated with those activities (such as dormitories, cafes and fitness centers).

Pretty soon, the price of tuition will decline to the point that it coincides with the newly capitated governmental payment plan, and lawmakers will no longer be able to avoid addressing a problem that the Brookings Institution dismisses as “often-hysterical”: the student loan debt crisis.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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Image: michaeljung

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