Student Loans Increasingly Come With Lesser Returns And More Burdensome Debt
By Jay Weller
The Federal Reserve recently reported that less Consumer Loans have reached delinquency than in recent years. This trend is not true for Student Loans where delinquencies continue to climb, and Loans are made without consideration of a Student’s ability to pay.
Beginning in 2003, the New York Fed has been examining files procured from Equifax to analyze the dynamics involved with Student Loans. Prior to 2009, young people with Student Loans were more commonly to own an automobile, have car loans, make more money, and have better credit than young people without Student Loans.
However, Wilbert van der Klaauw, the Senior Vice President of the New York Fed Research Group, says now that dynamic has been completely reversed. Young people with Student Loans are now less likely to have a car loan, have the capability to attain a home loan, and have worse credit scores than their compatriots without Student Loans. They are also more likely to be living with their parents.
The 2013 New York Fed Report also found that 11.5 percent of Student Loans are at least 90 days in default versus 9.5 percent for Credit Card Debt, which historically had the highest default rate. Despite this high default rate on Student Loans, the rate conceals the “real” default rate, because almost have
the Student Loans outstanding do not require a payment, either because the Students are still matriculated or the Students have somehow deferred the Student Loans.
It is clear that despite the dramatically escalating costs of a post secondary education, such an education is bringing typically smaller and smaller returns. Partially the cause of this is the Students themselves who choose areas of study that do not have much in terms of job opportunities, such as English Literature or Law, versus Engineering and Mathematics related studies.
The colleges and universities that are primarily entrusted with making Student Loans generally have no underwriting standards and scant limits on how much a Student can borrow in Student Loans. One solution may be achieved by holding the Colleges responsible if a substantial number of their former students default on their student loans. If the Colleges were forced to pay a penalty for high
Student Loan default rates among their students, they would likely be more careful in the programs and curriculums they offer. Conversely, Colleges with low default rates could be rewarded for their efforts through financial rewards and perhaps scholarships.
One factor that furthers the angst associated with Student Loans is the strong enforcement capabilities the Lenders and Federal Government has to collect from Borrowers. Bankruptcy will not eliminate Student Loans, except in limited circumstances. The Federal Government can take Borrowers’ income tax refunds and garnish their wages. Unfortunate parents who guaranteed their childrens’ Student
Loans can have monies taken from their Social Security.