Toby Talbot, Associated Press
When the housing crisis hit in 2009, it came at the end of a decade-long binge in which low interest rates combined with rising home values, leading borrowers to take on more and more debt, confident that their homes were assets, not liabilities. The more home costs climbed, the more credit consumers demanded to buy them and the less scrutiny went in to their ability to pay back the loans.
The next credit bubble may be higher education, argued at least one panelist at a discussion held at the American Enterprise Institute earlier this month.
All the markers of a bubble are there, argued the panel’s moderator, Alex Pollock, a resident fellow at the American Enterprise Institute in Washington, D.C.
“Pushing credit at any sector makes its prices rise,” Pollock said, “and rising prices, like college costs, lead to cries that since costs are now rising we need more credit and easier credit.”
Not everyone at the panel agreed that a credit crisis is brewing. One panelist argued that the real data show student debt is sustainable. Two others suggested alternative lenses that help clarify the real problems, including the high debt for dubious graduate degrees and any debt for no degree.
A vicious cycle
Easy student debt creates a vicious cycle, Pollack argued, which induces borrowers to borrow ever more while providers have no incentive to control costs.
The problem becomes more acute, Pollack said, if there are powerful players at the table who “get the cash from the loans but have no risk at all if the loans default.” The powerful players, in this case, would be the colleges and universities themselves, which cannot function without student debt but bear no share of the risk if it is not repaid.
The New York Federal Reserve Board, Pollack noted, recently reported that student loan “measured delinquency rate,” or the percentage of loans that are 90 days or more overdue, is the “highest of any consumer debt product.” In 2012, the delinquency rate for student loans stood at 17 percent, the New York Fed reported.
But the “effective delinquency” is far higher. Effective delinquency only includes the loans that are actually being repaid, but 44 percent of borrowers in 2012 were not making payments on their loans at all, through various forms of forbearance. The effective delinquency rate for those actually required to make payments was 30 percent. That 30 percent, Pollock notes, is identical to the delinquency rate of subprime mortgages at the worst part of the housing crisis.
Quite a different picture came from Matthew Chingos of the Brookings Institution. Chingos and his colleague Beth Akers released a data-heavy report last week on student debt.
Chingos and Akers looked at households led by people between 20 and 40 years old, the prime student debt repayment ages. They found that average balances for people with debt have gone up, Chingos told the AEI audience. Adjusting for inflation, the mean debt load went from about $6,000 in 1980 to about $17,000 in 2010.
Among households where one person has a graduate degree, however, the average debt load increased from $10,000 to $40,000 during that period, confirming the consensus in the room that graduate education is a debt hot spot.
He also noted that the share of households that carry debt with “some college but no degree” rose from 10 percent to 40 percent, and the average debt levels for this group have doubled.
Chingos and Akers also concluded, in a finding that somewhat surprised them, that both income gains linked to education and longer repayment periods have made the growing burden sustainable.
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