July 2017 Newsletter
A Weight on the Back of Young Americans
In this Issue
In a recent story, reminiscent of the subprime mortgage era of 2007, a portion of the outstanding $108 billion in private student loans have been ruled noncollectable by courts, due to missing or fake documentation. Just like those mortgages, these loans typically came with higher interest rates and fewer consumer protections than federal loans, often targeting low-income borrowers attending for-profit schools. In this issue, we dig in to some of the numbers and challenge some mainstream thinking in the massive student loan market.
A Weight on the Back of Young Americans
As of year-end 2016, there was roughly $1.3 trillion of student loans outstanding to more than 43 million Americans, an average balance of $30,000 per student. More than 15% of those borrowers are currently in long-term default on $125 billion in those loans. These numbers have ballooned exponentially since the financial crisis.
Figure 1: Federal Student Loan Balance Growth 2000-2016
The outstanding balance of student loans has increased by almost 1000% in just the last decade. According to Marketwatch, this outstanding balance is growing at over $2,700 per second.
Figure 2: Intersection of State Funding and Tuition
The massive increase in the outstanding student loan balance coincides with a steep reduction in available state funding for student borrowers. Students are forced to shoulder an increasing share of the financial burden of attending college.
There are many stories about students with six-figure loan balances and $1000 monthly payments barely making ends meet. However, contrary to mainstream thought most of these borrowers are making their payments. In fact, the data points to a counter-intuitive trend in which the lowest loan balances are the ones more likely to be in default; two-thirds of all current defaults are loans of $10,000 or less.
Figure 3: Percent of Borrowers in Default by Debt Size
It isn’t the $100k borrowers who are primarily defaulting, rather it is the millions of people who took out small loans and never finished the degrees.
Studies have shown that there is a correlation between delinquency rates and the percentage of borrowers attending for-profit colleges. Of students who started repaying federal loans in 2011, only 8 percent of those who attended four-year universities defaulted within two years, while the two-year default rate for those attending for-profit colleges was closer to 25%.
These data points are all interconnected. As the state funding for low income students dropped, more of them were driven into the waiting arms of for-profit colleges with skyrocketing tuitions. According to an article in the Atlantic, over 70% of students enrolled in four-year public or private universities earn a degree, while less than 50% of those enrolled in for-profit colleges do.
But it is not just for-profit colleges where tuition has inexplicably risen. At in-state universities, tuition and fees have gone up more than 200% higher than inflation. No other good or service in the American economy comes close to the price increases seen in higher education.
Figure 4: Tuition Increases by Category 1995-2015
Average tuition and fees at private national universities jumped 179% since 1995, while in-state tuition and fees at public national universities grew a staggering 296%. For reference, total cumulative consumer price index inflation over this period was 55%.
The most alarming aspect of these trends are for parents having children now, hoping to send them to a decent school in the early 2030’s. If you enrolled today at a private college, tuition can expect to run more than $130,000 over four years, but that same degree could cost a child born today more than $320,000, assuming a below trend growth rate of 5% annually.
Figure 5: Projected Average Tuition and Fees: 2015 and 2033
Based on average tuition and fees for 2014-2015 as reported by The College Board and assumed to increase 5% annually. These figures do not include room and board, books, supplies, or transportation.
Addressing this issue is critical to the long-term health of our economy, as it is unsustainable and economically ill-advised to saddle the next generation of the American workforce with such a large debt load. We are talking about trillions of dollars of lost consumer spending and investment over the coming decades, which will almost certainly be a drag on growth and a hindrance to our global competitiveness.
Chart of the Month
As is often the case in many other areas of the economy, women and minorities disproportionately bear the burden of these trends.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
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Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and The Philadelphia Group are separate entities from LPL Financial.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.