Aug
19
2011

Student Loan Debt and Delinquency Climbs Amid Fears of Higher-Education Bubble

In a sluggish job market in which consumer debts are generally on the decline, increasing debt from student loans coupled with rising student loan delinquencies might be a sign that a college financing bubble is growing, according to recent data.

Data from the Federal Reserve Bank of New York and Moody’s Analytics, a risk measurement and management firm, shows that since the start of the financial crisis debt from student loans has gone up while every other major category of consumer debt has gone down. The data also shows that more student loans are entering delinquency as graduates continue to struggle with high unemployment and shrinking compensation.

While outstanding debt from student loans has climbed 25 percent since the fall of 2008 — from $440 billion to $550 billion now — outstanding mortgage debt, credit card debt, and debt from auto loans and home equity loans has fallen. And while the delinquency rates of mortgage debt, credit card debt, auto loans, and home equity loans have either stayed flat or declined, the rates of student loans that were 90 days or more past due have increased. In the second quarter of 2011, the most recent period for which figures are available, the rate of delinquent student loans increased from 10.6 percent to 11.2 percent (“Student-Loan Delinquencies Rise, Adding To Fears Of An Education Bubble,” The Huffington Post, Aug. 17, 2011).

Perhaps most alarming, The Chronicle of Higher Education reported last month that of all federal student loans that entered repayment in 1995, 20 percent have gone into default.

Experts have warned for years that a college financing bubble was developing, fueled by borrowers who take out student loans to pay for college only to become severely burdened with debt after graduation and unable to find a job to repay the loans. And the problem is expected to only get worse.

The median starting salary for a college graduate from the class of 2009 or 2010 is $27,000, down from $30,000 a few years ago. A recent report by Moody’s Analytics predicted that over the next few years the trend will cause many students to be “unable to service their loans as income growth falls short of borrowers’ expectations.”

“Fears of a bubble in educational spending are not without merit,” the report cautioned.

Still, there is hope for borrowers of student loans. According to a recent report by the U.S. Department of Labor, the unemployment rate for workers with a college degree was just 4.3 percent in July, almost half that of those with some college (8.3 percent) and less than half that of those with only a high school diploma (9.3 percent). The national average for unemployment was 9.1 percent.


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