Saturday, April 14, 2012

Students Borrowing Against The Future

A student loan is designed to help students pay for university tuition, books, and living expenses. It seems that many students are borrowing against their future at an almost unimaginable pace, unfortunately the money is often used for things other then education. Too many young people and others taking student loans "living expenses" go on to include cars, trips, vacations and more. All this has a very dark side that will effect the lives of these borrowers going forward and has the potential to grow to crisis dimensions in the future.

In many ways society is encouraging young people to take on this debt and to hock their futures. This is akin to the, "I will gladly pay you Tuesday for a hamburger today" way of thinking. While it serves the propose of keeping large numbers of young Americans off the unemployment roles, it promotes a huge negative we can not ignore, much of this money is being poorly spent. I personally have witnessed several of these students rent an apartment, fail at school, and then be forced to move back in with parents when the money ran out. Sadly like the gifts from pawn brokers and pay day loan sharks, many of the borrowers will live to regret taking this easy money.

The burden of paying for these college loans is even beginning to encroach upon and  wreak havoc on the finances of an unexpected demographic: senior citizens. Reports show Americans 60 and older still owe about $36 billion in student loans, this information provides a rare window into the negitive dynamics of student debt. More than 10 percent of those loans are delinquent. As a result, consumer advocates say, it is not uncommon for Social Security checks to be garnished or for aggressive debt collectors to harass borrowers in their 80s over student loans that are decades old.

Student loans have received considerable media attention in recent months with growing concern about the crushing debt loads assumed by students and their parents. The Federal and State governments are deeply involved in the student loan market, either directly originating or indirectly guaranteeing them. Last year the Health Care and Education Reconciliation Act  ended private lending of federally subsidized loans, approved expansion of Pell Grants, and appropriated funds to invest in institutions that serve minority and low-income populations. Still, advocates for students clamor for more to be done to make more student loans available.

In October 2011, President Obama announced "executive actions" that capped monthly federal student loan repayment at 10 percent of discretionary income for college graduates lowering it from the previous 15 percent. While this cap comes as some relief to those who worry about how they will pay back their debt it also encourages more borrowing with the promise of more relief. These loans are typically shouldered by recent college graduates and other young workers that often face lower incomes and higher rates of unemployment as they enter the workforce.

From the second to the third quarter of 2011, the total outstanding student loan balance grew  from $852 billion to $870 billion. During that time period, other types of consumer debt declined or remained flat. Of the 241 million people in the United States who have a credit report with Equifax, our data provider, about 15.4 percent—or 37 million—hold outstanding student loan debt. But this debt is not evenly distributed across the general population. Among people under thirty years old, over 40 percent have outstanding student loan debt. Between the ages of thirty and thirty-nine, 25 percent have outstanding student loan debt. In contrast, only 7 percent of people who are at least forty years old are currently effected. This means that $580 billion of the total $870 billion in student loan debt is owed by people younger than forty.

Students may be struggling with debt more than we thought according to researchers, borrowers were late on $85 billion in student loans in the third quarter of 2011, which at face value is about 10 percent of the $870 billion in total outstanding student debt. While that rate is more or less in line with other forms of consumer debt like credit cards and mortgages, it is also “understated,” the team says, because not all student loans can be delinquent.

Unlike those other forms of consumer debt, students don’t have to pay back school loans  immediately. They get a break while they’re in school and in the six months after graduating. Almost half of student debt is in those approved grace periods, they add to the total balance but not the amounts past due. Once researchers exclude those loans to more accurately reflect the pool of borrowers who can actually be late, the delinquency rate more than doubled. In the end, 27 percent of the remaining borrowers were late on their payments, totaling about 21 percent of the aggregate loan balance.

The picture going forward is somewhat bleak for those that have taken student loans, with the borrowers about twice as likely to be behind on student debt as for credit cards, car loans, and mortgages. The report doesn’t compare the delinquency rate to previous periods, though it does confirm the total amount of student debt increased 2.1 percent between the second and third quarters of 2011 while other forms of consumer debt decreased. The average balance for student-loan holders is over $25,000. While this has driven the economy forward in recent years, this debt bomb is likely to weigh on future economic growth.

Footnote; As of the middle of 2013 total student debt has rapidly risen to around 1.1 trillion dollars. A post written shortly after I put this on my blog goes into the "politics and pandering" and how certain policies are used to get politicians reelected. The link is below,

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