This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
Enrollment in higher education in the United States has dropped by 11% from the peak in 2011. That’s a drop of 2.2 million students over the span of eight years, according to data from the Student Clearing House.
But over the same period, when student enrollment dropped 11%, student loan balances have skyrocketed 74%, to $1.6 trillion. The biggest portion of these loans is held by the federal government. It funded them by increasing its own debt.
So what’s going on here with this 11% decline in enrollment since 2011, and the crazy 74% surge in student-loan balances?
Moody’s, which rates structured securities backed by student loans, and which rates universities and the bonds they issue to fund their pet projects, and which rates Commercial Mortgage Backed Securities backed by “student housing,” well, it came out with a detailed analysis of what’s causing these student-loan balances to balloon like this – and it’s not what we thought.
Moody’s found that with scholarships, grants, and tuition-discounting all included, total college costs have largely tracked the increase in median household incomes since 2012. But before 2012, the ratio of college costs to household income had exploded.
For example, the average cost of public four-year schools, for students paying instate-tuition, runs just over $15,000 a year, which is about 24% of the median household income.
But that ratio of 24% of household income is down from 2012 when it peaked at about 25%. It has recently trended lower because household incomes have ticked up a tad faster than the costs of those schools.
The big damage was done in the years between 2000 and 2012. Over this period, for students at public four-year schools, costs exploded from 14% of household income to 25% of household income.
In dollar terms, costs soared 56% over the 12 years, from about $9,000 in the year 2000, to over $14,000 in 2012.
These costs include room and board, tuition, fees, tuition reduction programs, grant aid, and the like.
In terms of loans: In 2002, total debt per bachelor’s degree borrower – so people that actually took out loans while going to public four-year schools – was $22,500. But by 2012, this had soared to $27,000. And then it hit a ceiling. By 2018, this debt per bachelor’s degree borrower had ticked up by only $200 to $27,200.
This means that there are fewer students, and those fewer students have stopped borrowing more.
The total student loan balance of $1.6 trillion reflects the new loans added to that pile, minus the old loans getting paid down by former students. So this 74% surge in student loans since 2011 is a mix of those two factors:
- New loans being added;
- Old loans getting paid down.
And we’ll look at both of those factors.
So enrollment has been dropping, and student borrowing has hit a ceiling, and the ratio of student borrowing to household income has flatlined.
And Moody’s analysis found that the actual amount of new loans taken out every year – so-called “originations” – has declined since 2012, after the explosion of originations in the years between 2000 and 2012.
Originations peaked in 2012, with $115 billion in new loans taken out that year, up from $40 billion in new loans in 2000.
Since 2012, annual originations have dropped 8% to about $106 billion in 2019, which is below where they’d been in 2009.
This decline was driven by a 24% plunge in borrowing by undergraduates. In 2012, these undergraduates took out $72 billion in new federal student loans. By 2019, this had plunged to $55 billion in new loans.
A disproportionate share of new debt over the past few years has been incurred by graduate students. For example, in 2016, they made up just 15% of all students but accounted for about 35% of all new loans.
Many student borrowers don’t owe all that much: At the end of 2017, the median amount owed by the 45 million federal student-loan borrowers was around $17,500. Meaning that about 22.5 million students owned less than $17,500. All combined, half of the student borrowers owe less than $200 billion.
But for a fairly small group of student borrowers, the balances are gigantic: At the high end, 7% of federal borrowers owe over $100,000 each (often those with graduate degrees). And together, that 7% owes $500 billion.
So new borrowing exploded in the years up to 2012, and contributed a lot to the outstanding student debt. But since 2012, as enrollment fell and costs hit a ceiling, new borrowing has been a much smaller factor.
And what was the largest factor in driving up student-loan balances since 2012: student loan repayments have slowed to a trickle.
The repayment rate – that’s the percentage of existing debt that is eliminated in each year through repayments – averaged only 3% over the past 10 years. In 2019, it was down to just 2%.
In other words, in 2019, only about $30 billion of the outstanding student loans were being repaid, but $106 billion in new loans were being added.
This means that the old debt is coming off the books at snail’s pace, while new debt piles on much faster, and this disconnect causes the loan balances to balloon. And this situation has gotten much worse since the Financial Crisis.
For federal borrowers whose payment obligations started in 2006 to 2008, 40% hadn’t made a dent into their initial balance five years later.
But for the cohort for whom payment obligations started in 2010 to 2012, of them 49% have not lowered their initial balance at all (up from 40% five years earlier), and their monthly payments only covered interest. In many cases, payments didn’t even cover interest, and the balance of those folks actually grew. This is a serious deterioration from five years earlier.
By school category for this cohort for whom payment obligations started in 2010 to 2012:
- 20% of former students with degrees from private nonprofit schools, which include top-notch schools, have not paid down their initial balance one iota in five years. For all former students at these schools, so those with and without degrees, this jumps to 33%.
- 21% of former students with degrees from four-year public schools have not paid down any balances in five years. For all former students at these schools, so those with and without degrees, this jumps to 35%.
- 57% of former students at two-year schools had not paid down their initial balance one iota after five years.
- 75% of former students at for-profit schools who did not get a degree have not paid down their initial balance after five years.
The base line for federal student loans is that they should be repaid in 10 years. But only about a quarter of all balances are currently being repaid at that 10-year or shorter rate. Three quarters are being repaid at a much slower rate, or are not being repaid at all.
Moody’s found several primary causes behind this slow-repayment issue:
One, many graduates from for-profit colleges, two-year schools, and non-selective four-year schools, or students that didn’t complete their degrees, face underemployment and lousy job prospects, and they have trouble with their student loan payments.
Two, a biggie:People voluntarily choose longer repayment terms. Extended repayment plans are available to students with high balances. And students can consolidate multiple federal student loans into a new federal loan, and this new loan may offer longer repayment terms. There are now over $500 billion in federal consolidation loans outstanding, and many of them have terms of up to 30 years.
And three, another biggie: during the Great Recession, the government created the so-called Income-Driven Repayment plans. These plans were designed to make it easier for federal student loan borrowers to service their debt. Payments are based on income, family size, the state the borrower lives in, and the federal student loan type. The plans allow for payments to be so small that there is no repayment of the initial balance; or worse, for payments to be less than the monthly interest charges, where the outstanding balance actually grows.
As of mid-2019, loans under IDR plans have surged to $480 billion.
In addition to all this, borrowers can make use of student-loan deferments and forbearance options, where they don’t have to make any payments at all for a while, and loan balances grow as interest costs accrue.
And the incentive for former students is huge to drag these loans out: IDR plans include provisions of debt forgiveness after 20 or 25 years of qualified payments.
IDR plans are mostly used by borrowers with high loan balances: Over half of all the loans with balances over $200,000 are in IDR plans. They amount to $121 billion, or 25% of total IDR balances. These people are just biding their time until taxpayer-funded debt-forgiveness kicks in.
Under these IDR plans, those who splurged and borrowed recklessly, win the most. And those who sacrificed the most and worked like dogs, and whose parents sacrificed the most, and who went to cheap schools, to minimize their debt, they got shafted.
And there is another factor why student-loan balances continue to balloon: Despite all the deferment and forbearance options, the IDR plans, and the extended term plans and loan consolidations, etc.: The delinquency rates are very high for student loans. But defaulted student loans cannot easily be discharged in bankruptcy. So the slate cannot be cleared, and these defaulted loans stay on the books, and are considered part of the loans outstanding.
So, seen from the angle of slow or no repayments that have been a big driver behind the ballooning student loans since 2012, this fiasco takes on different nuances.
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