Student Loans Going the Way of Housing
Colleges are good at getting people enrolled. They get kids lined up with education loans. The money goes to pay exorbitant prices on textbooks. It pays for meal cards. Tuition is crazy high. Parents go along and shell out until their bank accounts are barren.
What colleges are not good at is getting the kids degrees. And those without those degrees have a hard time getting a good job to pay back a student loan. Instead, they fall into delinquency, starting off life saddled with an unpayable debt.
According to Fair Isaac Corp. (FICO), delinquencies on student loans made in the last two years have reached 15%. The pool of loans made between 2005-2007 is almost as bad, with 12.4% past due. Bloomberg reports that “almost 60% of bank managers surveyed in December expect delinquencies to worsen in six months, FICO said.”
The analogy with housing is unavoidable. Do you remember 2007? The peak in the price of housing had come and gone. But the leverage of the major investment banks was peaking at over 30 times at Bear Stearns, Merrill Lynch and Morgan Stanley.
Freddie Mac announced it wouldn’t buy risky subprime mortgages and mortgage-related securities. Subprime lender New Century failed. Bear Stearns liquidated two hedge funds that invested in mortgage-backed securities. The interbank market froze completely. A deal to take Sallie Mae private fell apart.
And in the middle of 2007, subprime delinquencies reached 15%. Catch that number? It’s the same as the student loan delinquency rate today.
Of course, when the subprime delinquencies hit 15%, that market was circling the drain, but few people realized it. In contrast, more and more people are realizing that there is a serious problem with student loan debt.
“This situation is simply unsustainable, and we’re already suffering the consequences,” stated FICO analyst Andrew Jennings. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever larger student loans without greatly increasing the risk of default.”
Curiously, Sallie Mae stock (SLM) rose on the delinquency news. But then again, the company would appear to be very much a going concern. Core earnings for 2012 were more than $1 billion, benefiting from the lowering of loan loss reserves and operating expenses.
Charge-offs increased to 4.19% of loans in repayment. Not to worry, says Sallie Mae: It expects that to decline in 2013. The company pays a 50 cent annual dividend, so it sure beats money market rates. And SLM says it will make $2.30 a share this year.
What could go wrong?
“You’re starting to see delinquencies pick up, and that trend is going to continue,” Compass Point Research & Trading’s Michael Tarkan told Bloomberg. “That’s the reality that we live with in student loans.”
The day after Bloomberg spilled the news from Fair Isaac, TransUnion made public that according to their work, “more than half of student loan accounts are in deferred status, where the repayment of the principal and interest of the loan is temporarily delayed. Deferred loans now represent 43.5% of all student loan balances.”
TransUnion points out that “more than half of college graduates under 25 are unemployed or underemployed — the highest rate in 11 years.” This makes going back to school and racking up debt a reasonable option.
“With the economy either in recession or slowly coming out of it during the study period, we had expected that student loan balances might increase as consumers frustrated with the job market went back to school to work toward a different career path,” said Ezra Becker of TransUnion. “However, the rate of growth we observed was truly eye-opening,” he added.
What kind of lender would be lending money to permanent students with bad prospects? The government, of course. “Between 2007-2012, federal loan balances jumped 97%, while private loan balances only rose 4%,” writes TransUnion.
There is a wide difference in delinquency rates between student loans backed by the government and private student loans. “From 2007-2012, federal student loan delinquencies rose 27%, while private loan delinquency rates actually dropped 2% in that same time frame,” claims TransUnion. “The 90-plus-day delinquency rate for federal loans was 12.31% as of March 2012, compared to 5.33% for private loans.”
The idea of students actually graduating from college is starting to get some attention. The New York Times reports:
“‘This is the first time in the history of modern higher education in which all the communities have come together — community colleges, research institutions, public universities, and small liberal arts colleges — and reached agreement that completion needs to be our most important priority,’ said E. Gordon Gee, the president of Ohio State University and chairman of the National Commission on Higher Education Attainment.”
The Times points out that 80% of students think they’ll graduate. Well, statistics show only half that number actually get the job done. So a report coming out this week calls for colleges to:
“find ways to give students credit for previous learning, through exams like the College Board’s College-Level Examination program, portfolio assessments, or other college equivalency evaluations. It also calls for more services and flexibility for nontraditional students, suggesting innovations like midnight classes, easier credit transfers, and more efficient course delivery, including online classes.”
Another idea gaining attention: a $10,000 degree, a so-called 10K-B.A. The extremely smart head of the American Enterprise Institute writes that this is what he obtained. “It is true that I am no Harvard man,” he writes. “But I can say with full confidence that my 10K-B.A. is what made higher education possible for me, and it changed the course of my life.”
While traditional colleges wrestle with the quandary of passing out degrees, you might wonder if Sallie Mae’s dividend is safe. Everything looks peachy over there. But one should remember Sallie’s sister, Fannie, that paid $1.18 in dividends in 2006 and $1.50 in 2007. The stock traded just below $66 a share in August 2007.
Today, it fetches less than 28 cents, and dividends are a distant memory. Get ready: We could be on the precipice of a wild ride in the student loan market. How it will play out in real life will be as surprising as the wreckage of the housing crash.
Sincerely,
Doug French
AWD says:
There is nobody more passive, less likely to rebel, less likely to start a revolution, less likely try and convict criminal politicians and fraudsters than a debt serf, which is what kids are nowadays. Debt serfdom rules….
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6th February 2013 at 2:26 pm
KaD says:
Nothing is going to get better until the uncollectable debt in all areas is purged from the system the way it was in Iceland. And our bought and paid for government isn’t going to voluntarily let that happen.
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6th February 2013 at 2:29 pm
Dorkus Maximus says:
My guess is they’ll reduce student loan interest rates to 0%.
Additional guesses:
They will fire up “americorps” or some other bullshit group to hire these youth, pay them a tiny stipend and forgive their student loans and they will cruise around the country as domestic spies. (they won’t be called “spies”, they’ll be called “volunteers” or “sustainable community” action workers or something, I like the “Obama Youth”).
Obama has said before that he want a large domestic force as well funded as the pentagon.
Most importantly, he has nationalized student loans. Why nationalize student loans? The best explanation is he wants control over the debtors. These pieces fit together too nicely to be ignored.
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6th February 2013 at 3:06 pm
ThePessimisticChemist says:
There are a lot of issues with the system, and much of it is outside of the college.
1) Inflation – Even if you manage to get student loans to cover your tuition, its still pretty damned expensive to go to school. Text book prices are exorbitant, and sky high gas prices hit the wallet pretty damn quickly.
2) “No child left behind” – The steady decline in public school quality has left many students unable to perform in even the most basic of classes. At the university I teach at, remedial courses (the pre-reqs to the entry level stuff) have such a high enrollment that it comprises the greater portion of what the PhD’s teach.
Its gotten so bad they’ve had to hire several adjuncts just to teach people basic algebra and writing skills.
3) Marketing – For the last 70 years the rule of thumb was better education = better paycheck. It didn’t matter what the degree was, if you just HAD one, you would get a job. And for a long time that was true. Sure, your engineers did better than your Liberal Arts, but the artsy students still got jobs.
Those days are long gone. The market is saturated with poorly educated useless degrees, and unfortunately today’s parents have missed the changing times.
Carpentry, electrician, plumbing, manufacturing jobs (welding, millwright etc etc) all make GREAT wages relative to the amount of money you put in, and truth be told hang even with most college degrees these days.
Personally, I think the modern university is going to be a thing of the past pretty quickly. People only get paid to sit around and think shit up when its easy to come by money to pay them. When the going gets tough, they’ll have to pick up a hoe/shovel and work or starve….just like the rest of us.
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6th February 2013 at 3:07 pm
Administrator says:
TPC
I know of an Ivy League business school that had to introduce a basic writing course this year for all of its MBA students.
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6th February 2013 at 3:45 pm
Eddie says:
“At the university I teach at”
Shameful grammar for a college level instructor there, TPC. Mrs, Smith, my sixth grade English teacher, would have torn you a new ass for that sentence. hehehe.
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6th February 2013 at 3:50 pm
Eddie says:
“I know of an Ivy League business school that had to introduce a basic writing course this year for all of its MBA students.”
Wharton? You’re kiddin’ me. Say it ain’t so. LMFAO!
Did you check out the cool stuff I bought on Amazon with my not-quite-maxed out credit card?
Just wait. Hillbilly Stills is an Amazon featured seller.
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6th February 2013 at 3:59 pm
Administrator says:
Eddie
I ain’t kiddin you.
Was it a Fluke 376 True-RMS AC/DC Clamp Meter with iFlex?
That’s a nice payday for me. I think you should buy 10 more.
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6th February 2013 at 4:12 pm
KaD says:
Speaking of hilbilly; can anyone tell me what the hell ‘Hillbilly caviar’ is?
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6th February 2013 at 4:18 pm
Eddie says:
That and the canned butter. That Red Feather canned butter is the shit. But that was another one of your links.
I was needing the clamp meter for my solar panel hacking carreer anyway. It cost me no more than it would have anyway. It’s a win/win.
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6th February 2013 at 4:20 pm
Administrator says:
I was wondering who bought the butter. I get 10% from that company. You’re gonna make me rich.
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6th February 2013 at 4:24 pm
Llpoh says:
Ran straight to this thread thinking it was a sex thread. So disappointed to find out it is just another student loan thread.
Admin – false advertizing will get you in trouble.
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6th February 2013 at 4:29 pm
Administrator says:
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6th February 2013 at 4:31 pm
AWD says:
Admin prefers you buy dildos, and slather them up with canned butter.
Hillbilly caviar
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6th February 2013 at 4:33 pm
AWD says:
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6th February 2013 at 4:35 pm
ThePessimisticChemist says:
@Eddie –
Blow me
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6th February 2013 at 4:41 pm
Llpoh says:
Eddie – he is a chemist not an English prof. You cannot expect him to have language skills. Or to be capable of civil interaction with others.
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6th February 2013 at 4:48 pm
ThePessimisticChemist says:
@Llpoh –
Blow me
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6th February 2013 at 5:27 pm
Llpoh says:
See – there he goes again. He should quit sniffing the chemicals. He is becoming quite anti-social. Unlike me.
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6th February 2013 at 6:03 pm
Kill Bill says:
Hillbilly Caviar
1 (15 ounce) can black beans
1 (15 ounce) can pinto beans
1 (15 ounce) can black-eyed peas
1 (15 ounce) can white corn
1 green pepper
1 red pepper
1 medium onion
Sauce
1 cup white sugar
3/4 cup cider vinegar
1/2 cup vegetable oil
2 tablespoons water
1 teaspoon salt
1/2 teaspoon pepper
Directions:
1
Rinse and drain all beans and corn, finely dice peppers and onion,mix all together in bowl.
2
to make the sauce heat, sugar ,vinegar, oil,water, salt & pepper, bring to a boil,remove from heat and allow to cool. Pour cooled sauce over bean mixture and allow to sit at least overnight. Serve with tortilla chips.
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6th February 2013 at 6:13 pm
Kill Bill says:
I wonder when Burnbanke is going to start buying student loan backed equities.
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6th February 2013 at 6:15 pm
Kill Bill says:
Three of the highest-profile colleges in America are suing students over unpaid student loans, according to a Tuesday report in Bloomberg News.
Yale University, George Washington University and the University of Pennsylvania have all filed lawsuits recently over loans to students that have fallen into default.
The lawsuits all focus on recouping money lent through the Perkins loan program, which offers loans subsidized by the Department of Education with colleges serving as the lenders of record. These loans are focused on students with “exceptional financial need” and offers an interest rate of 5 percent, no default fees and options for loan forgiveness.
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6th February 2013 at 6:26 pm
DaveL says:
“GOING DOWN”
Oh, I thought this was something else. Did you know that Linda Lovelace’s grandmother went down on the Titanic?
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6th February 2013 at 7:57 pm
KaD says:
Thanks KB!
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6th February 2013 at 11:35 pm
BUCKHED says:
I did a little research on the cost of college when I was in school, verses today . I took the last year I was in school and I ran the years tuition through a couple of inflation calculators I found on the internet .
In all cases, indexed for inflation, the cost of tuition should have been on average 50% less than it is today.
Hell I have a friend who is a Master Mechanic for BMW’ and Mercedes who is pulling in 150K a year…he never stepped foot in a college classroom .
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6th February 2013 at 12:49 pm