In this study, we examine the rapid growth of the student loan industry over the past few years, the weakening performance of loan portfolios, and what these trends suggest for future performance and lending volumes.
I will not go through the interesting analysis here, but simply show two very powerful graphs from the paper, and jump to the conclusions. The first of these graphs shows the rapidly growing student loans balances, which continue to grow although total loan balances have been shrinking:
However, if there is one assumption in this analysis that I would challenge, it is that this type of increase in tuition relative to other sectors will continue for another 10 years at least. As I have often indicated in earlier posts, I think society will find a way to prevent continuing increases of this magnitude, and I don't think it will take 10 years to do so.
Deritis suggests a number of factors relating to the significant increases in student debt. Among these are decreases in state support for higher education, endowment losses, demographic changes, rise of for-profits, and government continued support of student loan programs even when other types of loans were drying up. Deritis argues that in many cases, government incentives have lead to undesirable results.
Based on analysis of all available data, Deritis suggests that future defalt rates are likely to rise significantly. His conclusions give food for thought:
The long-run outlook for student lending and borrowers remains worrisome. Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the broader economy. Origination volumes have remained elevated and are projected to continue to grow with rising demand.However, there is increasing concern that many students may be getting their loans for the wrong reasons, or that borrowers—and lenders—have unrealistic expectations of borrowers’ future earnings. Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.