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The subprime education crisis

The subprime education crisis

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The NY Federal Reserve’s Household Debt & Credit Report shows that student debt is rising fast and is now at an all-time high:

Household Debt and Credit Developments as of Q4 2013:

Category

Quarterly Change*

Annual Change**

Total as of Q4 2013

Mortgage Debt

(+) $152 billion

(+) $16 billion

$8.05 trillion

Student Loan Debt

(+) $53 billion

(+) $114 billion

$1.08 trillion

Auto Loan Debt

(+) $18 billion

(+) $80 billion

$863 billion

Credit Card Debt

(+) $11 billion

(+) $4 billion

$683 billion

HELOC

(-) $6 billion

(-) $34 billion

$529 billion

Total Debt

(+) $241 billion

(+) $180 billion

$11.52 trillion

 That’s a good thing, isn’t it? It shows that lots of young people are signing up for college instead of sitting around at home doing nothing or doing dead-end jobs.

But all is not well. Here are the figures on delinquent loans from the same report.

90+ day delinquency rates:

Category

Q4 2013

Q3 2013

Mortgages

3.9 %

4.3%

Student Loans

11.5%

11.8%

Auto Loans

3.4%

3.4%

Credit Cards

9.5%

9.4%

HELOC

3.2%

3.5%

All

5.0%

5.3%

So, more than one-tenth of people with student loans are in arrears. This is a significant rise: only two years earlier the delinquency rate was 8.5%.

The Wall Street Journal says that the rise in student credit has been concentrated most among those with poor credit records (my emphasis):

“Of the 12% overall rise in student debt, a third—or four percentage points—came from borrowers with the worst credit history, or those with credit scores of 620 or lower. About five percentage points came from those with scores between 621 and 680, and roughly two points was from those in the middle quintile—scores between 681 and 720. Only about one percentage point came from those in the 720-to-780 range. And among those with scores above 780, student debt was flat.”

And the eventual delinquency rate may well be higher:

“….the official delinquency rate likely understates the problem, since many borrowers are still in school and thus don’t have to make payments yet. Excluding those borrowers from the overall pool of student debt would likely increase the delinquency rate.”

Oh dear. We appear to have what might be termed sub-prime student loans on which there are rising defaults. In fact it is possibly worse than sub-prime mortgages, because unlike mortgages, delinquent student loans cannot be written off in return for asset seizure. The borrower is stuck with the debt – possibly for life – while the lender, i.e. the US government, receives nothing. Really it is the worst of all possible worlds.

However, even delinquent borrowers receive an education that should enable them to get a better job – shouldn’t it? So eventually, they will get better jobs and start paying their debts. After all, figures show that graduates earn much more over their lifetimes than people without degrees.

As these charts show (source: The Atlantic), since the 2008/9 recession, graduates have suffered high unemployment and underemployment:

Main article image

Main article image

But these charts also show that graduates experienced high unemployment and underemployment after the two previous recessions.  The present difficulties experienced by recent graduates are to some degree cyclical. In which case we can expect things to improve as the economy picks up. After all, as The Atlantic points out, the graduates who experienced unemployment and underemployment in previous recessions all went on to find good jobs, didn’t they?

I am not convinced. I fear the decline in graduate incomes is at least partly due to other causes that are not so easily solved.

While the cost of degree courses has soared – and with them, the debts taken on by students - the incomes of people with bachelor’s degrees have actually been falling for over a decade:

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Source: Citi via Business Insider

There are a number of possible causes for the decline in graduate wages. It may be due to the secular stagnation described by Larry Summers; the Chinese labour dump; or the changing nature of work. Or perhaps some combination of all three, maybe with a few other things such as the closing of the gender pay gap (downwards) and the reduced power of unions. But I think there is another factor too.

Older graduates gained their degrees when far fewer people were doing them. They have generally been handsomely rewarded for their scarce skills. So the returns on their investments were excellent – fairly low debt and considerably higher incomes. But over the last decade, more and more young people have done degree courses, believing that they too will get the high returns that previous graduates have enjoyed. And as the number of people with bachelor’s degrees has risen, so the value of those degrees has fallen, particularly for those who major in arts, humanities and business. These days, graduates are taking jobs in McDonalds (and I don’t mean management jobs, either). To get the sort of incomes that previous cohorts with bachelor’s degrees enjoyed, young people now have to have masters’ degrees, MBAs and PhDs. And even that isn’t enough: employers are also asking for multiple languages, professional qualifications such as accountancy and years of relevant experience. A bachelor’s degree is no longer anything special.

But unfortunately that does not mean that young people shouldn’t do bachelor’s degrees.  On the contrary, it means that they MUST do them, or risk long-term unemployment. What was formerly a high educational standard achieved only by a few – and therefore well paid – has become a MINIMUM level of educational attainment for many jobs. And the more essential a bachelor’s degree becomes, the higher the fees that universities and colleges are able to demand. So as incomes stagnate – because a bachelor’s degree is in effect degraded – fees rise ever higher and students become more and more indebted.

High fees and the prospect of long-term debt certainly don't seem to discourage would-be students. Indeed, one of the effects of high youth unemployment since the 2009 recession has been to increase the number of college admissions – up 3.7% in 2008-2012 according to The Heritage Foundation.  That increase is now tapering off as labour market conditions improve and young people opt for work instead of study. But fees and associated student debt are continuing to rise, albeit more slowly. 

We now have the most highly-educated young people in history – and the most highly-indebted. They are starting their working lives with degrees that will never get them the jobs of which they dreamed, and with debts that they will never pay off.

This chart from Zero Hedge shows how the wave of student debt is beginning to break: 

Main article image

For once I agree with Zero Hedge. Here is the next crisis in the making. Sub-prime loans, to fund sub-prime education.

And although I am writing about the US, the same is happening in the UK too. The value of a degree is dropping while the debts taken on by students in order to obtain degrees are rising.

What have we done to our children?


Related reading:

The problem with university - Tomas Hirst

How much does a degree improve your lifetime earnings? - Spectator

Graduates earning less than those on apprenticeships - Telegraph

Debt collectors are gorging themselves on student debt - The Week

Image courtesy of The Telegraph. 


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Frances Coppola

Matthew,

Indeed, I had wondered about that. Predatory lending aimed at people for whom it was inappropriate was a feature of the subprime mortgage crisis too. Nothing changes.

One other data point: nearly 30% of student loan borrowers drop out before graduating and among students with loans for two-year, for-profit colleges, this rises to over 50%. By contrast, at traditional nonprofit and public schools the dropout rate among borrowers is just 20%. This suggests that the core problem is not just a subprime problem, but possibly a case of predatory lending aimed at students without the academic ability to graduate from college, for the benefit of for-profit educational institutions.

"What have we done to our children?" Indeed. Outsized administrative salaries mirror the corporate world. Financialization of education turns hope to despair and learning into a commodity, cheapening our culture and the pursuit of truth and beauty. We can do better by our children, our future.

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