Posted by: Mark Gimein on November 2, 2011 at 10:28 AM
When will the student loan bailout happen? And more important, will it be students who get bailed out, lenders or both?
If you think it’s too early to be asking this, you haven’t been looking at the numbers coming out about student loans. On the We Are The 99% photoblog, where protesters hold up signs explaining their grievances, just about every third sign cites crushing student debt load.
The Atlantic’s Daniel Indiviglio put together the killer chart on this two months ago, showing student loans rising 511% in just over a decade. The Atlantic figured the total of outstanding student loans at $550 billion. Reuter’s Felix Salmon points out that’s too low. A widely repeated USA Today story said student loans would reach $1 trillion this year. That’s closer (federally guaranteed loans alone exceed the Atlantic’s $550 billion), though, as Salmon shows, USA Today seems to be badly confused about the source of that $1 trillion.
More interesting than the total number, though, is how it will get repaid. The New York Fed has put together a beautiful (read: ugly) map of student loan delinquencies, which nationally stand at 10.6% of loans. You can get a rough sense of it here, with the darker colors showing greater defaults. But to get the full force of it you should click through to the New York Fed site and tap the student loans tab. Roll over the darker counties and you’ll see delinquency rates of more than 20%. Across the Southeast you can see a belt of bad student loans forming, much like the foreclosure belt that stretched across the Southwest.
The problem here is not just that the student loan delinquency rates are rising. It’s that the numbers that are out there don’t seem to be giving the whole picture. The Department of Education dings schools whose students default within two years of graduating. Borderline schools—especially for-profit ones, who depend on student loans for the overwhelming bulk of their revenue—do their best to make sure their grads file all the right deferral forms and avoid delinquencies for those two years, even if they can’t actually make payments. After that, they’re on their own.
Nonetheless, 8.8% of federally guaranteed student loans that entered repayment in 2009 were in default by the end of 2010. To put that in perspective, keep in mind that in this case “default” means nine months of missed payments. This is a big jump from the 5% or so of loans from the last decade that are in default, and it feels like a leading indicator—like the first batch of subprime mortgages to go bad. With higher-interest private loans, the numbers are going to be worse. That 8.8% number isn’t cumulative. It reflects the number of students who defaulted pretty much right away, the equivalent of the subprime borrowers who never made a payment. In case the analogy with the mortgage bust is too subtle, you can go ahead and look at the student loan lender Sallie Mae’s primer on securitizing private education loans, online as a PDF.
A common take on student loans is that there’s little risk for lenders. Federally guaranteed loans are backed by the government, and even privately backed loans can’t be discharged in bankruptcy (in this education loans differ from other debts). The part about the government guarantee is true: yes, eventually the federal government will have to take over those loans. The other part is just nonsense. You can’t get money where there’s none to be got. That student debtors can’t discharge their loans in bankruptcy won’t help them find the money to pay.
Eventually both private lenders and the government will be on the hook. The government has already moved to ease some loan terms. It will need to find more, especially for those snookered into paying for degrees worthless in the job market. The private loans, meanwhile, will simply blow up. We may as well start figuring now how graduates, taxpayers, lenders, and schools will split the bill.
Photographer: Stan Honda/AFP/Getty Images
Map: New York Federal Reserve Bank, source, data source: credit reporting agency, TransUnion LLC’sTrend Data database.