Sep

12

 I read this interesting article lately that posed the question:

Is it possible that student loans are to some extent simply replacing unemployment insurance as a source of subsistence income? If so, we may be creating another asset bubble of sorts, with consequences much more dire to the debtors than anything we have seen before. Thanks to the “bankruptcy reforms” of 2005, those student loans cannot be “cleared” by bankruptcy, no matter how hopeless the situation. We may have simply created a new version of a Dickensian “debtors’ prison” that may ultimately imprison an entire generation of young borrowers."

source

The answer is yes. 

(Department of Education) The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools.

And keep in mind student loans are still expanding in this crisis. While every other sector of debt is contracting this is the only area growing. What is worse is that the earnings for recent college graduates doesn’t reflect the higher costs of college:

Since 2000, in real terms college costs are now up by 23% Since 2000, in real terms real pay for college graduates is down by 11%

The reason when we look back and see greater earnings for those who go to college is the reality that many never came out with so much debt. Decades of data are being used and applied to the current rip off and high cost model that has never been seen in the past. Plus, you had a tightly regulated market and for-profits were nearly unheard of.

Alston Mabry writes:

Also, as I understand it, the default rates, especially for for-profits, are understated, because the DOE only looks at default rates within a certain period after the student leaves the school (two years, I believe). And so the schools have programs to keep people out of default until they fall out of the counting period, after which they are on their own.

Jordan Neuman adds: 

It is like anything else, whether you want to call it a "bubble" or "ever-changing cycles." In the late-90s the argument for stocks was that they had never had a down 15-year period. By definition, then, no price was too high for stocks if held for the long-term. Of course taking the yield down to 1% was never part of stocks' history. The same goes for housing in the last decade. Housing prices only go up over time!

The reasons that college educated workers have done better historically is that the college degree served as a screening mechanism when fewer went to college. Now that everybody goes the screening is worth less to employers. But colleges are charging, and are abetted by Government policies, for the old promise. Just like health care and housing, government policies have distorted the pricing mechanism enough to wreck the whole system.
 


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2 Comments so far

  1. Ed on September 14, 2011 8:13 am

    “Just like health care and housing, government policies have distorted the pricing mechanism enough to wreck the whole system.”

    Amen!

  2. arthur on September 20, 2011 6:47 pm

    I can’t understand one thing, maybe here someone smart can explain this. When I went to college I locked in my student loan rate at 2.4% that was in 2004 (I refinanced), I had a scholarship in a shitty school, but I took out a huge loan just to have an arb between that rate and what I made on it. Right now thanks to our wonderful congress of 2005-2006, the rate is fixed at 6.8% and there is nothing no one can do about it (I am talking about Direct loans). 7% is a magic number, because whatever you have at 7% will double every 10 years (they made it a sexy 6.8%).
    I can not understand how can that be when 10 year yielding less than 2%??!?!?! If anyone knows who is in charge of another policy of f… the middle class up the… in perpetuity , please let me know.

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