Investors Business Daily, May 9, 2012
By David Hogberg
With a possible higher-education bubble looming, taxpayers are on the hook for about $850 billion in student loan debt.
Exactly how much of that the federal government would have to bail out if the bubble bursts is unknown, but with delinquency and default rates rising, it could be substantial. Yet Congress may exacerbate the problem with current efforts to maintain lower interest rates on student loans.
The amount of outstanding student loan debt has skyrocketed from about $440 billion in late 2008 to about $1 trillion today.
Of that, $500 billion is owned directly by the Education Department, according to Sallie Mae data. Another $350 billion was originated by private lenders with a government guarantee under the now-defunct Federal Family Education Loan Program. Sallie Mae estimates that the DOE will originate $113 billion in student loans this year vs. just $7 billion from the private sector.
"I think this data — $1 trillion in outstanding debt and a lot of it held by the federal government — is fairly persuasive evidence of a bubble," said Jonathan Robe, a research and administrative associate at the Center for College Affordability and Productivity.
Have Debt, Need Job
Robe points to a recent AP analysis that found 53% of bachelor's degree holders under age 25 were either unemployed or underemployed.
"That may be another sign of a bubble in that more people may have a harder time paying back their loans," he said. "That could end up putting a bigger burden on taxpayers."
Debt loads are rising. Average student debt for new graduates rose 24% after inflation from 2000-2010 to $16,932, according to the liberal Progressive Policy Institute. The average for all borrowers is $23,300 , the New York Federal Reserve says.
Adding to the problem are higher delinquency and default rates.
About $85 billion in student loans are delinquent, the New York Fed said. That's about 14% of borrowers. However, that understates because many borrowers, such as those who are still students or have just graduated, don't have to make loan payments. Among borrowers required to pay back their loans, about 27% are delinquent.
The rate of default — those borrowers who haven't made any payments in at least nine months — is also on the rise. The DOE reports that the default rate rose to 8.8% in 2009 from 7% in 2008.
But the DOE figures only look at defaults over a two-year span. Data examined by the Chronicle of Higher Education showed that 20% of government loans that went into repayment starting in 1995 were in default. The rate was 31% for those at a two-year college and 40% for those attending a for-profit college.
Loans Are Part Of Problem
Part of the problem is rising college tuition, which has skyrocketed nearly 32% after inflation from 2000-2010. Average annual tuition is now about $17,464 based on data from the National Center for Education Statistics.
But Robe says that is at least partly a function of easier access to student loans.
"Cheap and readily available subsidized student loans have contributed to the tuition explosion ," said Robe. "Those loans make students far less price conscious and it enables the schools to raise tuition because they know if the student can't pay the tuition, they can pass the buck on to the taxpayers."
But both President Obama and GOP presumptive nominee Mitt Romney favor extending the 3.4% rate on federal Stafford Loans, set to rise to 6.8% in July.
The dispute is over how to pay for the $6 billion cost. The GOP-led House voted to cut preventative health fund in ObamaCare. That won't fly in the Democrat-led Senate. But Republican senators blocked that chamber's version, which would hike payroll taxes on small business.
In the end, a lower rate will only encourage more prospective college students to take out loans.
Sen. Dick Durbin, D-Ill., wants to let people discharge student loan debt in bankruptcy. The bill would only apply to private loans not backed by the U.S. gov ernment. However, "That would probably increase the pressure to be able to do the same with federal loans," said Robe.