US Student Debt Impact Likened to Subprime Crisis
By Matt Kennard and Shannon Bond in New York
October 16, 2011
US university students and graduates are facing a
double whammy of ballooning debt loads and high
unemployment, raising worries that a potential
delinquency crisis could bleed into the wider economy.
Student debt has increased nearly sevenfold from $80bn
in 1999 to $550bn at the end of June 2011, according to
the Federal Reserve Bank of New York. Other estimates
from the Department of Education put outstanding
student loans as high as $805bn.
But the unemployment rate for 20- to 24-year-olds is
nearly 15 per cent - higher than the overall 9.1 per
cent rate - compromising the ability of graduates to
pay off their growing debts.
Student loan delinquencies have risen from 6.5 per cent
in 2003 to 11.2 per cent in June 2011, nearly as high
as the 12.2 per cent rate on credit cards.
"The long-run outlook for student lending and borrowers
remains worrisome," Moody's, the rating agency, said in
a recent report. "Unlike other segments of the consumer
credit economy, student loans have not demonstrated
much improvement in performance despite some
improvement in the broader economy."
In the first half of 2011 student loans were the only
category of lending where the delinquency rate rose.
As state budget cuts have driven many public
universities to raise tuition fees, students are
bearing a larger share of their educational expenses.
Alberto Gutierrez, a 38-year-old doctoral student at
the University of California, Los Angeles, has had to
borrow more money and take on a part-time job to cover
his expenses, including a $3,000 monthly mortgage
payment. He receives some financial aid, but not as
much as he had hoped. "It's a public university so
they've been cut a lot. Resources are pretty slim," he
To tide him over, Mr Gutierrez borrowed another
$10,000. "I'm going to be about $25,000 in debt when I
finish. I've never owed that much money."
Some observers have compared the potential impact of a
steep rise in student loan delinquencies to the
subprime housing crisis, in which a rise in defaults
cascaded into the wider economy. The criteria for
federally guaranteed student loans are not as stringent
as for other kinds of debt, and many loans have been
securitised and sold off to investors.
The rise of the for-profit college industry, where
enrolment has grown 10 times faster than for public and
non-profit universities in the past decade, is causing
particular alarm: default rates among students at for-
profit colleges are significantly higher. A report from
the US Government Accountability Office last year found
that some for-profit schools "encouraged fraudulent
practices" when advising students to apply for federal
But even though the total level of outstanding student
debt is projected to reach $1,000bn in the near future,
according to the Department of Education, it is still
considerably smaller than the estimated $2,500bn in
risky subprime loans.
While homeowners can default on their mortgages,
students cannot walk away from their loans. The wages
of student loan borrowers can be garnished and the
debts cannot be included in a bankruptcy filing, except
in cases of undue hardship.
"I don't think it's a subprime crisis in the making,"
said Mark Zandi, chief economist at Moody's Analytics.
But he added there would be higher delinquency and loss
rates on loans as graduates faced a difficult economic
environment. "Student loans have historically had
credit issues and it's going to get worse."
Activists, including the liberal website Moveon.org,
have called for the government and lenders to forgive
That proposal is winning the backing of the Occupy Wall
Street protesters who are demonstrating against the
perceived excesses of the financial sector.
Ani Monteleone, who graduated from the Oregon College
of Art and Craft in 2006, carried a sign calling for
student debt relief at an October 5 march on Wall
Street. She said monthly loan payments were a burden
for graduates who were already struggling to pay their
bills and find a job. "They bailed out the banks. Why
can't they bail out the people?" she asked.
Some analysts say such a plan would bail out the wrong
people. "It's not about creating a fairer income
distribution," said Justin Wolfers, at the University
of Pennsylvania's Wharton business school. "It's
actually high school dropouts who are doing badly, not
necessarily university graduates."
Mr Gutierrez is not waiting for such a bail-out. He
wants to stay in higher education when he finishes his
degree, but finding work will be hard. He accepts he
could go into delinquency.
"In California, there's no university hiring, I will
have to relocate and even then most are hiring for non-
tenure track positions," he said. "I'm looking to end
up with a temporary lecturer position, which I'll have
to juggle with other part-time work."
Copyright The Financial Times Limited 2011
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