It’s no secret that college is an expensive endeavor, one that continues to hit the wallet well after the graduation caps are tossed. Recent data shows that the student loan situation is growing worse every year: students are accruing more debt and not always paying it off on time.
Mark Kantrowitz is the publisher of FinAid.org and has testified before Congress about the importance of financial aid programs. The bad news, according to Kantrowitz, is that not only is the burden of debt on students heavier than ever, it’s not going to get lighter any time soon.
“The total student loan outstanding debt exceeded outstanding debt for credit cards for the first time in 2010,” he said. “At the end of this year or early next year, outstanding student loan debt is expected to pass the trillion dollar mark for the first time.”
Between 1999 and the beginning of 2011, the federal student loan debt ballooned 511 percent. In the first quarter of 1999, the outstanding student loan debt was around $90 billion. By the first quarter of 2011, slightly over a decade later, the balance was around $550 billion in outstanding federal student loans.
Though the private sector doesn’t have the same stringent reporting requirements as the federal loan program, it’s easy to see that private loans have followed a similar steep upswing: The National Postsecondary Student Aid Study for the 1999-2000 school year reported $3,589,813,190 in debt through private student loans, which increased by 67.6 percent in the next year, and then by another 20 percent the next. Now, private educational debt is about $405 billion.
Combined, there is currently about $955 billion in outstanding student loans.
Moody’s reported this week that the default rate for private student loans is at 5.4 percent, up from 4.5 percent a year ago.
The rising rate of default can be linked directly to the poor state of the economy, Kantrowitz said.
“The main drivers of default rates are unemployment rates, interest rates and graduation rates,” he said. “It makes sense: if you don’t graduate, you’ll have more difficulty paying back your loans.”
The unemployment rate for those with bachelor’s degrees has also been on the rise, corresponding to the rising default rate for loans. Loans’ interest rates are also on the rise, an unfortunate conflation of sunsetting legislation that kept federal rates down and the national deficit, held at bay in part with the earnings from loans.
Unlike the financial crisis triggered by subprime mortgages, however, the student loan problem is not a bubble. It’s a balloon. As Kantrowitz explains it, a bubble is a disconnect between the value of a thing and its actual cost.
“It isn’t a student loan bubble so much as a long-term trend toward decreasing college affordability,” he said. “You can’t flip an education, turn around and sell it for more. You can only use it.”
Because student loans are a highly profitable, low-cost program for the government — they make about 15 cents back for every dollar they lend — there’s no danger of the loan program ending. Even on defaulted loans, the government still manages to recover about 85 cents per dollar loaned. As the deficit needs more feeding, however, interest rates on educational loans are one way to try and fill the gap, as are rising tuitions at state and public schools, which force students to take on more debt and make it harder for them to pay back that debt.
As education gets more expensive, students will look for less expensive options for their futures, thus decreasing the number of bachelor’s degrees earned per year and lowering the nation’s education rate.
“College affordability is going to get tougher and tougher with each passing year,” Kantrowitz said. “Every dollar of government grants is a dollar spent and every dollar of loan is actually profitable to the government. It’s going to be more difficult for families to pay for college over the next decade. Some students will shift their enrollment from more expensive college to less expensive college.
“Some will just not go to college.”