Try to name the type of debt associated with these figures: total debt of $870 billion, 66% of which is owed by those under 40 years old, and an estimated 21% of which is delinquent. It might sound like a subprime mortgage snapshot from 2007, but these numbers exist right now -- in student debt. Here are the facts behind this bubble and what it means for the future.
Looking for new opportunity
Given the bleak unemployment picture, many high school graduates, the jobless, and the underemployed have returned to school in hopes of improving their ability to get a better job. This, in part, has led to the ever-growing balance of student debt. In 1999, outstanding student debt totaled $90 billion. Today, a Federal Reserve study pegs student debt at that $870 billion figure. But students will just pay off this debt once they graduate, correct?
Unfortunately, a large number of these students will not graduate. A study done on public institutions found that only 60.4% of full-time students and 24.3% of part-time students earned a bachelor's degree within eight years. For-profit education reveals even more dismal figures, according to the Senate Health, Education, Labor, and Pensions Committee:
|Bridgepoint Education (NYSE: BPI )||Ashford University||84%|
|Washington Post (NYSE: WPO )||Kaplan||69%|
|Corinthian (Nasdaq: COCO )||Everest, Heald, WyoTech||66%|
|Apollo (Nasdaq: APOL )||University of Phoenix||66%|
|EDMC (Nasdaq: EDMC )||The Art Institute, Argosy, Brown Mackie||64%|
*Withdrawal rate for associate degree students enrolling in 2008-2009, as of Sept. 30, 2010.
Those who go back to school potentially find themselves in a worse off situation, still without a job and degree, but now strained by thousands of dollars of debt. Those under 30 years old owe almost 34% of the total debt, and unfortunately those aged 16 to 24 are about twice as likely to be unemployed than the general population. As The Wall Street Journal reported, even those with jobs have seen decreased wages: "the average inflation-adjusted hourly wage for male college graduates aged 23 to 29 dropped 11% over the past decade to $21.68 in 2011. For female college graduates of the same age, the average wage is down 7.6% to $18.80."
What if this seemingly unbalanced equation of more debt and less pay does not solve itself -- and loans continue to default?
Educational loans typically are not eligible to be wiped from a person's debt when declaring bankruptcy. Also, there aren't any material objects to repossess from someone who defaults on education. But the government can take other steps such as garnishing wages or taking your tax refund. This means student debt will stick around, and as the National Association of Consumer Bankruptcy Attorneys concludes, consumers are "unable to afford to engage in consumer spending that sustains a growing economy." Simply put, for every $200 that goes to pay off that student loan, one fewer iPhone can be bought -- and that totals 4.35 billion iPhones not bought.
The White House offered one solution. Currently, the law limits monthly student loan payments to 15% of discretionary income, and forgiveness of the loan after 25 years, with a planned reduction in 2014 to 10% of discretionary income and forgiveness after 20 years. Last October, Obama issued an executive order to speed the eventual reductions to take effect this year as opposed to the scheduled 2014. This order only affects those who took out loans in 2008 or later.
The NACBA, being a group of bankruptcy lawyers, proposes another solution of allowing student debt to be discharged in bankruptcy again, as it was prior to 1976. It cites that there were few abuses of the system and that "fewer than one percent of all federally insured and guaranteed educational loans were discharged in bankruptcy." And currently, with the inability of student debt to be swept away by bankruptcy, private educational lenders enjoy an extreme protection from default. No doubt the guaranteed nature of these debts entices lenders -- and for-profit schools -- to push more debt upon potential students.
This bubble may slowly deflate instead of pop. Students will have to weigh rising tuition rates with the new reality of falling incomes after graduation. I would also expect to see more regulation around the for-profit education industry, as Pew Research shows that even though only 9% of students attend for-profit institutions, they make up an astounding 44% of all loan defaults.
And most important to the economy, we might already be seeing the drag on spending that these loans cause. Short of complete forgiveness of this debt, this bubble will float around for decades.