by Brian T. Lynch, MSW
College graduates have always earned more in their
lifetime than non-college graduates, but higher tuition costs is increasing borrowing
and the higher interest rates on these loans is taking a bit out of
their future. In addition, there continues to exist a higher unemployment rate for college graduates.
The Federal Reserve Bank of New York just released its
quarterly Household Debt report. It reveals that non-housing debt is rising and
student loans are a big contributor. Non-housing
debt increased 2.8% since last quarter and 4.9% from a year ago. Housing debt
decreased 1.9% from a year ago.
Looking at just the non-housing debt, student loans account for 36%
of the total, up a percent from a year ago. Auto loan debt is increasing faster
over the last year and now accounts for 30% of all non-housing debt. Student loan debt rose 4% from the last
quarter and 7.29% from a year ago. Meanwhile credit card debt is unchanged over
the past 12 months while other forms of non-housing debt declined by over 3%.
The Federal Reserve also reported good news that
90-day delinquency rates on household debt has declined. For the banking
industry it is a twin blessing when borrowing rises and delinquency falls. For
consumers it is a mixed blessing, at best. But, when you look at the particular, it
is immediately clear that college educated adults are in serious trouble. They are defaulting as never before. Look at
the line graph below and you will see what I mean. The student loan default is
the red line that starts as the third highest default rate in 2004 to exceed
credit card and auto loan defaults as of last year.
Source: Fed Report http://www.newyorkfed.org/regional/householdcredit.html
According to the Fed report, outstanding student loan balances increased
to $1.027 trillion as of September 30, 2013, a $33 billion increase from the
second quarter. The 90+ day delinquency
rate increased, and is now at 11.8%.
Full
Report: http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q32013.pdf
Higher tuition costs means greater borrowing which results in
higher monthly payments on the debt. The high rate of unemployed, or
underemployed college graduates is part of the reason for the higher default
rates. What follows is a snippet from an
excellent article in the Atlantic Monthly. (Go there to read it in full)
How Bad Is the Job Market For College
Grads? Your Definitive Guide
APR 4 2013
They're Better Off Than High
School Grads ... Bachelor's holders (in blue below) have about half the
unemployment rate of high school graduates (in red below). BA's are still
suffering from double the low rate of joblessness they enjoyed pre-recession.
And yes, they're even worse off than they were during the tepid economies of
the early nineties or pre-housing bubble oughts. But on the whole, you'd much
rather have a degree in this job market than not.
But They're Still Hurting... That's all bachelor's
holders, though (or at least the ones over 25, who the Bureau of Labor
Statistics routinely tracks). So what about young adults just off campus? The
numbers aren't a nightmare, but they aren't especially pleasant either. Last
month, the Bureau released a special
report looking at
Americans under 30 who'd earned a bachelor's in the past year, as of October of
2011. About 73 percent were employed (the paper didn't specify between full
time and part-time). More than 11 percent were still looking for work.
In addition to the higher rate of unemployment, rising
tuition costs over the past decade has meant larger monthly payments. College
tuition costs have even risen faster than medical costs, and much faster than
the consumer price index. Below is a
very clear graphic depiction of this from Professor Mark J. Perry out of the
University of Michigan.
Professor Mark J. Perry's Blog for Economics
and Finance
The chart above illustrates graphically the "higher
education bubble" by comparing the annual increases in the CPI for
"College tuition and fees" (7.45% per year since 1978) to annual
increases in the CPI for "medical care" (5.8% per year since 1978) to
annual increases in the median price for new homes (4.3% per year) to the
annual increases in the "CPI for all items" (3.8% per year
[See more at: http://mjperry.blogspot.com/2011/07/higher-education-bubble-college-tuition.html#sthash.HF1DSyOu.dpuf
]
The good news, according to the Trends in Education
Website, is that the rate of tuition increases is declining. Here below is a snippet from their Website.
Average
Rates of Growth of Published Charges by Decade
The 2.9% one-year increase in average published tuition and fees
for in-state students at public four-year institutions in 2013-14 was 0.9%
after adjusting for inflation. This relatively small increase in prices means
that despite very large annual increases earlier in the decade, tuition
inflation between 2003-04 and 2013-14 was similar to that between 1983-84 and
1993-94.
Figure 4: Average Annual Percentage Increases
in Inflation-Adjusted Published Prices by Decade, 1983-84 to 2013-14
Each bar in Figure 4 shows the average annual rate of
growth of published prices in inflation-adjusted dollars over a 10-year period.
For example, from 2003-04 to 2013-14, average published tuition and fees at
private nonprofit four-year colleges rose by an average of 2.3% per year beyond
increases in the Consumer Price Index.
A third reason why so many college students are unable to
pay their loans is the rising cost of financing those loans. Karen Weise
recently wrote a an article in Business Week that laid out the problem of
higher student loan rates. A snippet
appears below.
Why
Your Student Loan Interest Rate Is So High
Business Week
Joe Szczepaniak pays a
3.5 percent interest rate on the mortgage for his house in a Chicago
suburb. His car loan is 1.79 percent. The federal education loans he took
out to send his four sons to college? They’re all above 7 percent. “Student
loans have been the big black holes of my budget,” he says. Szczepaniak, who
calls himself “Mr. Quicken” because he carefully tracks his finances, questions
why the $200,000-plus he owes on the student loans doesn’t “reflect reality”
and today’s low rates.
The answer is that
Congress, not the market, sets rates for federal loans—which account for
85 percent of the roughly $1 trillion in outstanding education
debt—and refinancing to a lower rate is rarely an option. Now some lawmakers
and private lenders are looking for ways to give education borrowers more
repayment and refinancing options.
[Read more at http://www.businessweek.com/articles/2013-04-04/why-your-student-loan-interest-rate-is-so-high
]
Student
loan rate had been set to double, so congress acted to mitigate the sudden
increase that was to occur. There is
good information on the Consumer Financial Protection Bureau Website detailing
the recent changes. An update on
government student loan interest rates was recently published (see below). At a time when I can get a car loan from my
credit union with an interest rate below 3%, our college students can't get a
federally subsidized student loan for under 3.86%, and private bank loans for
students is even higher.
Updated on August 13,
2013:
Last week, the president signed legislation passed by Congress to adjust federal student loan interest rates for this academic year. Here’s what the new rates look like:
Last week, the president signed legislation passed by Congress to adjust federal student loan interest rates for this academic year. Here’s what the new rates look like:
We have to stop and ask ourselves what the long term
impact will be on our children and our economy if we don't do more to make
college affordable.
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