Michael Olenick: Digging Into Data on the Student Loan Scam

By Michael Olenick, a research fellow at INSEAD who writes regularly at Olen on Economics

The New York Times ran an op-ed piece on student loan debt, The Student Debt Problem Is Worse Than We Imaginedby Ben Miller of the Center for American Progress. As Yves would say, Quelle Surprise: it’s a disaster. Using an Infographic derived from data in a Freedom Of Information Act (FOIA) request, for over 5,000 schools, the article shows student loan defaults will soar to about 15.5% after five years.

While the FOIA is a dramatic way to get the results, there’s an easier method: looking at investor reports. Like most asset backed securities, reporting data on student loan performance  is readily available. Plus, as a public company, the one of the biggest student loan servicer, Navient, is required to disclose much of the information.

Let’s look at Student Loan Servicer Navient’s first quarter 2018 71-page investor deck, here. Page 10 clarifies that as of Sept. 30, 2017 there are $1.5 trillion in student loans. 22% are for $40,000 or more, 21% are $20K-40K, and 21% are $10K-20K, and 36% are under $10K. On page 20, Navient explains that average student loan payments have increased by $64.79, from $263.19 to $327.79 from 1999-2000 graduates to 2018 graduates. If true, that great; the 24.6% increase is well under inflation which itself is far below tuition increases over the same timeframe. If their repayment information is comparing the same loan terms, then keeping payments under control – especially in the education sector where tuition far outpaces inflation – is a remarkable feat.

Moving on, we find that borrowers who compete a degree are about three-times more likely to default than borrowers who do not finish a degree. That makes sense and is a reason that Obama’s Department of Education shuttered scam schools, a policy Betsy DeVos – a longtime proponent of scam schools (like her boss) – is working furiously to reverse.

On page 41 Navient cleanly lays out, in three bullets, why investors love and the general public loathes these loans. Quoting directly:

  • Insurance or guarantee of underlying collateral insulates bondholders from most risk of loss of principal
  • Typically non-dischargeable in bankruptcy
  • Offer significantly higher yields than government agency securities with comparable risk profiles

Translating: this is effectively the same as US debt, since it is guaranteed by the US government and cannot be discharged, but at much higher interest rates. They’re all but bragging that it’s corporate welfare.

On page 53 we get to the part the default triangles, the historical default rates.

For overall undergraduate and graduate rates, the default rate peaked at 25.7% in repayment year 2008. You’d think that is caused by the financial crisis, but the rate was creeping up for years before that, at 24.6% for 2007, 23.7% for 2006, 22.7% for 2005. In 2015, the last year data is available shows a default rate of 10.4%. Either students are better managing their loans or servicers have done a better job of masking defaults through gaming the system.

Page after page of figures shows more interesting information. Students with a co-signer are about twice as likely to default as students without a co-signer. This occasionally has the unfortunate effect of student loan debt collectors calling grieving parents, after the death of their child, to make good on those co-signed student loans. Similarly, for-profit schools have about double the default rate as non-profit schools. People with FICO scores above 740 are about one-fifth as likely to default as those with scores below 670, though there is no information how much the student loans helped cause the low credit scores and resulting high cost of debt.

Besides the annual report there are also asset-backed security investor reports, here. These have more detailed information.

Since the New York Times piece focused on a five-year window I thought I’d take a ten-year one. Here is a linkto SLM Student Loan Trust 2008-9, chosen because it is about ten years old and it’s the first I clicked on. It’s the most recent investor report, with a distribution date (the day funds are paid to investors) of July 25, 2018. Navient is the servicer and Deutsche Bank the trustee. The figures reported are the first distribution date, Aug. 28, 2008 and the most recent reporting date, June 30, 2018.

The trust started with $4.056 billion of principal balance and now has $1.227 billion, so about three-fourths of the funds were either repaid, consolidated into other loans, or paid by the US Treasury as guarantor. Specifically, in Q2 2018 Navient collected $21.8 million from borrowers, $13.4 million from the guarantor, and $23.3 million from consolidations, and a smidgen more from other irrelevant income. Summarizing, after ten years less than 40 percent of the principal Navient collected for a big bundle of student loans came from students. Ouch.

Navient’s report shows 61.4% of the loans (by percent of principal) are current meaning that just under 40% are something other than current. About 14% are 31 or more days late, 15.7% are in forbearance, 8.1% are in deferment, and the rest in various other forms of student loan limbo. I’m not a loss expert but a bundle of ten-year-old loans only has 61.2% performing seems like a mess. 89.2% of the loans are for four-year schools, 9.4% for two-year schools and 1.4% for technical schools; for-profit status is not disclosed.

I almost feel like writing about student loans is taking a cheap shot. There is no other field – not even subprime debt at its worst – where we could find a rating like this. For Navient Student Loan Trust 2017-2, S&P projects a default rate of 42.5% – 47.5% on the $921.4 million of loans. They’ve rated that AA+, the same as the US debt that underlies it. In a roundabout way I suppose that the rating makes sense since the loans are guaranteed by the US government. But lending almost a billion dollars while projecting up-front that just under half will default – leading to ruined credit, stress, and an inability to purchase houses, cars, or start businesses – doesn’t seem like wise economic or public policy.

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  1. Ignacio

    If I remember correctly debt is considered non-performing when it is +3 months late. Isn’t this metric used in student debt?

    1. Bugs Bunny

      As noted above it’s rated the same as a gov’t bond issue because:

      – Insurance or guarantee of underlying collateral insulates bondholders from most risk of loss of principal
      – Typically non-dischargeable in bankruptcy
      – Offer significantly higher yields than government agency securities with comparable risk profiles

      If bankruptcy discharge were reinstated, there would be a trillion dollar *sonic boom* over the Acela Corridor.

      1. JBird

        If bankruptcy discharge were reinstated, there would be a trillion dollar *sonic boom* over the Acela Corridor.

        Should I care? Almost all other personal debt is dischargeable and this is legal loan sharking. The Federal Government, Big Finance, and Big Ed all created this dream eater and it is time that their dreams go away too.

  2. diptherio

    …lending almost a billion dollars while projecting up-front that just under half will default – leading to ruined credit, stress, and an inability to purchase houses, cars, or start businesses – doesn’t seem like wise economic or public policy.

    That’s the understatement of the year. Actually, making loans to people you know won’t be able to re-pay them has a name: predatory lending — and that is quite obviously what this is. Thank you, Michael, for putting this article together. It should be required reading for every student and parent considering taking out student loans.

  3. Larry

    I applaud Olenick for naming this operation corporate welfare. The academic sector receives a free pass for their operations. I suspect change is coming because the system can no longer sustain itself. Already mid-tier colleges are worried about the near term drop in applicants and Trumps odious policies are stemming the flow of wealthy and subsidized foreign students.

    1. Robert Rexroat

      I would like to believe you are right about “the system can no longer sustain itself,” but I’ve been reading articles offering this warning for a decade and I don’t see much of a change. I sincerely hope you are right Larry. What would precipitate, and eventually cause, a collapse of the student loan industry? I honestly do not know and welcome the insights of others. A while back, NC posted an article noting the Dept. of Education was recording the stories of peoples struggles to repay their loans, but I don’t know if that will lead to any meaningful policy decisions. Collections agencies are beginning to realize that you can harass people all day long, but many (perhaps most?) don’t have any money to pay. I figure as long as DeVos is at the helm things will likely get worse. I just keep repeating Michael Hudson remark as if it were a mantra: “Debts that can’t be paid, won’t be paid.” Take care everyone.

      1. Grumpy Engineer

        @Robert: I share your concern. If student loans were issued by private lenders who had to fully absorb and suffer the losses associated with bad loans, the unsustainability of the EIC (“educational industrial complex”) would have revealed itself many years ago.

        But that’s not what we have. Instead, 90% of student loans are issued by the US Department of Education, which simply does not care whether loans are paid back or not. Well, they care somewhat once the loans have entered the payback period, but there is zero effort made to avoid issuing bad loans in the first place.

        And the colleges are taking advantage of that. As long as they can coax naive 18 year-olds into signing on the dotted line, regardless of the actual odds of being able to pay it back, they will do so to keep the federal loan dollars pouring in. After all, we keep hearing that educational debt is good. And more educational debt is better. Right?

        And unfortunately, no mechanisms exist to limit this. Because the Education Department can draw unlimited funds from the US Government, it can send out ever-larger dollar amounts and endure ever-climbing default rates forever. Until we implement policies that limit outgoing loan dollars, nothing will change. And the odds of that happening are quite low, as it is assumed that only education-hating racists would propose lending standards.

      2. Larry

        I believe many colleges are going to be in serious trouble because of the drop in students. All but elite institutions are going to face a reckoning when they can no longer pay to keep the lights:


        I think that this slow death of many institutions is going to require some kind of response. My hope is that it will be a fundamental change in how we fund and approach higher education, to make it more affordable, but I could definitely be wrong about that. But having several friends teaching at mid-tier liberal arts colleges, they’re very concerned about the demographics they’re up against in the coming years. These colleges and admins will be coming to politicians, as will the students left on the side of the road when doors are shuttered. Some kind of response will be required.

        I only have anecdotal evidence of another trend emerging. Young adults that were traditionally college track are reconsidering their options. Community college first, or no college at all. One personal example is my niece’s boyfriend. He is forgoing college because he doesn’t think it’s worth the risk of potential debt vs. the reward. He has no interest in professional degrees and sees college educated youth struggling to get good jobs. When you know college educated people working at Starbucks or bartending, you can see how the degree might pay off. He’s landscaping and considering going into the family business of oil delivery/boiler repair/installation. Granted, he has options, but young people are openly discussing the value of what a college degree gets you. Mind you, these are not kids with parents paying tuition or even considering applying to elite institutions.

        1. jrs

          oh landscaping competing with the illegals, yea that’s a good career path …

          being born into a family business, yes being born with a silver spoon has always been lucrative, too bad we can’t all have it.

          they can question the value of what college gets you until they pursue the job ads and see how many of them require a bachelors even if it shouldn’t be that way. Then they might change their tune.

          1. LyonNightroad

            “they can question the value of what college gets you until they pursue the job ads and see how many of them require a bachelors even if it shouldn’t be that way. Then they might change their tune.”

            Thereby increasing the supply of degree holders and further suppressing the value of a degree and increasing the jobs requiring one. A self-perpetuating cycle.

            I’ve always suspected that intelligent people do well regardless of possessing a degree and the highest value from a degree goes to the mediocre.

            This seems especially true now, as any hiring manager will tell you, with how poor of an indicator of general intelligence a degree has become.

        2. Arizona Slim

          If I were that kid, I’d be looking at that family business. Because it’s going to be needed for quite some time to come.

          Over time, he might decide that he needs some business expertise, but he can take a few classes at his local community college. Or he can just learn on the job.

  4. JTMcPhee

    And one way to sharpen the contradictions and force the crisis is to #juststoppaying. A lot of people already are, out of simple impossibility and inability.

    But of course the “good Puritans” who struggled to get to that point where they could “burn the mortgage,” https://en.m.wikipedia.org/wiki/Mortgage_burning, are now all “Hey, I did it, it hurt me, so you other mopes can damn well do it too. Even if all that is doing is making the Banksters even wealthier off their own scams. It’s only FAIR.”

    Proving once again the pronouncement of Jay Gould, Titan of Wealth, that he and his kind can “pay half the working class to kill the other half.”

    A nice confirmatory proof of the Milgram and Stanford experiments, https://www.zeroaggressionproject.org/mental-lever/stanford-milgram-authority/

    #juststoppaying— maybe an idea whose time has come? https://getoutofdebt.org/63127/top-10-reasons-stop-paying-unaffordable-private-student-loan

    I mean, it’s not like corporations and high-wealth individuals don’t do this all the time: Owe the bank $50,000 and you have a problem. Owe the bank $50 million and the bank has a problem. Even Newsweek took note of the phenomenon of rich-sh!t “strategic default.” #juststoppaying, overload and crash the evil system. It’s the only leverage the poor debtor has any more.

    1. perpetualWAR

      For once, I agree. You’ve been saying that regarding mortgages too, for which I am proof-positive that strategy doesn’t work. But these student loans have zero collateral. So, go for it: #JustStopPaying.

      1. JTMcPhee

        Actually, I don’t recall ever saying that as to mortgages (as opposed the student loan scam). I may have observed that a lot of rich people have engaged in “strategic default” on a wide variety of “debt obligations that MUST, ABSOLUTELY, NO EXCUSES, THE BIBLE SAYS SO, be repaid,” and somehow usually manage to escape any significant consequences.

        May I offer useless condolences for your experience with a mortgage. Anecdotes don’t make for winning arguments, though — I know people who strategically defaulted on middle-income mortgages, and are still living in the same house, not paying and not making any effort to pay, and ‘for some reason’ the lender or servicer or “claimant” on the missing-in-action note has not taken any action to foreclose or evict.

        The likely only way to a Jubilant resolution of the student loan debt overhang is mass action. Seems absolutely clear that all the “weight of the law,” whether Clowngress or judiciary, is implacably in the corner of the looters. If enough people pursue the only “remedy” available to them, simply refusing to pay, then unless the Posse Comitatus Act is rolled, and the Imperial Military and such forces are turned loose to attack the defaulters (remember, according to rich people, that is NOT a bad word), the structure crashes and burns. Only way forward then is likely a massive “forgive us our debts, as we forgive our debtors” recognition-of-reality.

      2. Puzrish Dagan

        But these student loans have zero collateral.

        The asset that’s distrained is the borrower’s credit rating.

    2. LyonNightroad

      Reading an article where libertarians try to hijack the lesson of the stanford prison experiment was comedy gold.

  5. vlade

    Paid for education makes theoretical sense, if the education will increase earning potential for the “buyer”. But good ole Econ 101 says that in such a case, the providers of the education will up their fees up to the point where they capture a lot of that increase (as much as they can). The easier it becomes for students to fund that, they more they will capture (as the more ), as the student loans are not tied in any way form or shape to future earnings.

    Moreover, higher education used to be a signalling device (and – suprise surprise – it wasn’t signalling knowledge acquired! ) The more of population gets the signalling device, the less is it worth, in a typical case of confusing causality and correlation. With paid for education, the degree can be bought (as few institutions will really be willing to kick out paying students and get a name for it), which lessens the signalling value even more.

    If you want paid education, one could argue that the student debt should be only payable on reaching above-average earnings (i.e. delivering on the promise). In which case, one would wonder what’s the point and whether it can’t be achieved by higher taxation of above-average earnings (coz the point is not funding anymore).

    In other words, paid-for education makes little to no societal sense.

    1. Jim A.

      The more of population gets the signalling device, the less is it worth, in a typical case of confusing causality and correlation.

      SOOO many people fail to realize that a higher proportion of the population with higher degrees does not change the proportion of high paying jobs within the economy. So the college degree, instead of marking a boundary between blue collar and white collar has in many places become the border between employed in retail and marginally attached workers. So a college degree is even more important even as it is not worth as much as it used to be.

      1. JTMcPhee

        I used to think the idea was that having an educated citizenry would lead to increased “opportunity” for all — smart people improving politics and the arts and toothpaste, year over year.

        I used to think that. Reality-check time. Smart people manipulating genes, creating “artificial intelligence (sic),” manufacturing propaganda (NO IT IS NOT “FAKE NEWS,” FOLKS!), inventing ever-bigger ways to track and control the mopery, all headed, apparently, for a singularity event. Check your vulnerability score: http://consulting.itg4.com/Personal-Security-Vulnerability-Assessments.aspx

        I managed, with a lot of effort and the blessings of Medicare (not the VA “take a pill, take several” psych “help) to stop having those Vietnam-induced flashbacks and dreams of violence and destruction, but now my dreaming mind is serving up the terminal sensations of a nuclear weapon detonation in my nearspace. The sudden flash and heat and then nothing… at least in my dream I am turned away from the thing, so don’t see it coming.

        A Big Lie: “The coward dies a thousand deaths, the hero dies but once.” Check your local Congressional Medal of Honor recipient for a truth check on that one…

        And I do now have a recurring dream, that I at age 70+ have been recalled to active military service. And no amount of pointing out that my DD-214 says I was honorably discharged after completing my enlistment, and that years later got that letter saying that my inactive reserve status was over and I was no longer subject to recall, has the slightest effect on the NCOs shoving us along the path of the MArch of Folly to “do war” in other climes and places… There’s real horror for you.

        1. jrs

          I suspect people are not just getting more formal education but actually becoming better informed on many things (for various reasons and that is probably one of them but so are other factors) and yes probably smarter. It doesn’t mean propaganda doesn’t still often win the day, but I suspect overall.

          But it doesn’t matter, there are only minimal individual opportunities, and not enough of an social awareness for radical social change, yet anyway …

        2. LyonNightroad

          You’d be lucky for it to be in your nearspace. Only ~10% get that pleasant death. If you are unlucky, far more likely for you to be covered in 3rd degree burns, alive for quite a while, possibly blind, possibly deaf. In fact, some of the religious among us will probably think they’ve died and gone to hell before they are even dead, how would they know they haven’t?

    2. anonymous

      Student lending may be a type of supply/demand two-fer:

      D. Encourage indebtedness => somewhat more pliable citizenry.
      S. Encourage oversupply => undermine liberal tertiary education.

      Graduates of various institutions acquire a type of focus on earning money although those at the bottom end face seemingly permanent low prospects. Too bad so many were lured in with phony promises of rosy futures.

      All those rock-climbing walls and other marketing ploys in the college arms race have to be bought through tuition inflation, even if not used much. Academic standards would seem to suffer as a result.

      It isn’t much of a leap to imagine how changing colleges would eventually filter down to change primary and secondary schools. Combine that with the rise and support for so-called charter schools and academies (Plato, who is that, a cartoon character?) as part of a long-term plan to reduce liberal influence.

  6. Synoia

    The Student Loan program will collapse the housing market, the car market and the marriage (children) market. There is no room in most people’s budget for this set of payments.

    #juststoppaying also mean #juststopborrowing, and the thee markets, housing, cars and marriage, all float on piles of debt.

    By it’s actions, the US Government has destroyed the future of many US businesses.

  7. BenX

    This fits well with global wage arbitrage. If US citizens stop going to college, it opens up seats for out-of-state/country students (who pay 3x tuition/fees) and result in a US-employed H1B employee that employers can underpay. And by discouraging college education, it increases the supply of American blue collar workers, who can now better compete with emerging nations for low-paying jobs. Of course, it also further erodes what’s left of the middle class – a red flag on fire for people who read history.

  8. Bill Carson

    Student loans are nothing more than modern-day indentured servitude. Back in the 19th century, capitalists advanced people’s cost of crossing the Atlantic and then forced them into labor until the loans were repaid.

    Today people aren’t crossing oceans as they once were; they are crossing a real and perceived educational barrier. Capitalists adapted as capitalists do, and have redesigned that educational gulf to be more expensive than it once was. They will be glad to loan the money, but you better understand that you will be indentured to the bank until the loans are paid.

    And also like Capitalists do, they’ve enlisted the federal government to enforce the contractual obligations and guaranty their profits.

    Nice work if you can get it.

  9. 4corners

    I have nothing but contempt for the student loan complex. But any discussion that doesn’t address responsibility on the borrower side is hard to take seriously. As in the case with mortgages, borrowers stand to profit from the loans. There has to be some acknowledgment of agency in the risk-reward equation.

    Politically, I think emphasis on #juststoppaying would lose a lot of people who would otherwise be sympathetic. In contrast, some of the issues raised in the article such as corporate welfare, profligacy at universities, etc. might see broader support.

    1. JBird

      About the fairness issue. Higher education was almost free for two decades and then for a few decades was still a good investment. Now? Going to college risk lifetime serfdom for jobs that are almost gone.

      I can suggest around twenty books, and there are many, many, many more books and films that have documented the many destructive, deceptive, and often just illegal ways Big Finance has profited since 2000 to now with almost no prosecutions at all.

      I could also write similarly on the Federal, state, and municipal governments (the wars, campaign “finance”), policing for profit, phone/internet providers, check cashiers, big pharma, big ag, big ed, and so on. Add all almost all the remaining large corporations like Walmart… the #juststoppaying crowd probably has a lot of support especially as the government refuses to even just adjust the debts to a more fair level. The system has screwed them (and us all) and the elites block all change because it is profitable for them, so just what is left to do? Go die? Or maybe just stop paying?

  10. Jeremy Grimm

    The student debt and its handling suggests our “betters” no longer concern themselves with even a modicum of effort at seeming to take interest in the public good or hiding their predations on the public and the public purse. It also suggest they are either unable to look far into the future or else feel confident they will be long gone before things unravel — or they have absolute confidence in the State’s security forces and surveillance.

  11. VietnamVet

    There is a concerted plan to steal, extort, scalp and load the 90% with debt (1.5 trillion dollars in student loans alone). America’s Middle Class is being decimated to enrich the 1%. This financial hording and offshoring will collapse when there is nothing left to steal. Even Bezos’ DC rag today had articles on how Metro can’t afford its pensions or Chinese twenty somethings are earning enough to invest in high-rise apartments in Malaysia. The contempt of Globalists for lowlifes is obvious. The “Sons of the Soil” (Deplorables) will inevitably run amok. The West is on the edge. A war with Russia in Syria will be enough to push it over.

    1. TheScream

      The student loan crisis is just another symptom of the underlying disease. The entire edifice is rotten. “Fixing” student loans will likely mean forgiveness and bailouts for the lenders which is the opposite of the goal we need to achieve.

  12. Scott1

    I suffer empathetically with youth and their parents. What are loans ought be grants in the US when it comes to Education, one of the two main duties of any government.
    Of course a guaranteed to be repaid, or forever listed debt as wealth will attract the banks.
    I attribute to the New Deal GI Bill the strength of the US up until those higher numbers of well educated veterans began slowing down exited and the Reagan piss on your head era was begun.
    The fact is that it all starts at the very beginning where students in elementary schools are allowed to be taught fantasies of the religious cultures. The Federal Gov. ought be providing standards and money to make sure there is per capita equality of educational opportunities.
    There are States that would prefer control of the curriculums and poverty over prosperity. States have finite treasuries and the Federal Gov. has infinite economic power where these issues are concerned.
    You don’t get things you don’t ask for and obviously State representatives simply do not demand all that it would take to create a well educated population in every state.
    Always and again it is the goals that matter. Below the Mason Dixon there are states whose goals are to create pliant, loyal, ignorant, labor that will allow their monied betters to tell them what to do.
    They do not want a population that tells them what to do for them. The economically ignorant leading the economically ignorant is damning the US to the hell.
    That Nancy Pelosi is determined to push Pay as You Go in 2020 shows just how disgusting the Democratic Establishment is.

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