Moody's looks at student-debt problems

Moody's Analytics has published a very nice analysis of the student loan situation by Cristian Deritis :

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:

The second graph, similar to many I have shown before, demonstrates a major driver behind this growth in loans - higher education tuition increases compared to increases in other sectors:

Always impressive how increases in higher ed costs outpace the rest of the pack!

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.

Comments

[Kymia]

This post is very important to read, especially for first year students that enter into college. Many students do not understand the obligations of student loans, and end up in over their heads. I don’t think that getting a loan to pay for college is bad. I think being responsible with the money is the key.

[Alan Collinge]

The only way to contain costs is to force the oversight authority for the loans which fuel this industry to take their responsibility to ensure that the schools offer quality educations at low cost seriously.

This will never happen as long as the Department of Education is actally making, not losing money on defaults. The only meaningful way to make this happen is to restore the consumer protections which have enabled this predatory and perverse lending model to survive and thrive.

So at a minimum, standard bankruptcy protections must be returned to these loans, and if this does not occur, then society will simply write off these loans as a huge national joke, and justifiably so. And the author is right that it won't take ten years. By my best estimate, the current default rate is well over thirty percent, and is probably closer to forty percent. At what "critical mass" will an "en-masse rejection" occur I do not know, but I suspect that we will be knocking on the door at fifty percent...this could be 6 months from now, or it could be a few years off. Certainly less than 5 years, though...and as most predictions I have made for this industry, I suspect it will come far sooner than we may think.

[Jeff W]

Hi Lloyd,
Thanks for posting these telling graphs on the state of higher education. I think the rise in student loans vs. the decline in total loans is particularly interesting. I will be sure to check out the whole report (although I appreciate you featuring the highlights here!)

I also really appreciate your optimism regarding higher education and strategies to contain costs over the next 10 years.

Best,
Jeff

PS - I also "digged" this!