Student loan debt crisis is about to get worse

While Wall Street and U.S. President Donald Trump tout news of a booming stock market and low unemployment, college students may be quick to roll their eyes. The improved economy has yet to mean higher wages for graduates already struggling to pay down massive debt, let alone ease the minds of students staring down the barrel of six-digit loan obligations yet to come.

Federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession. As the cost of tuition and borrowing continue to rise, the result is a widening default crisis that even Fed Chairman Jerome Powell labeled as a cause for concern.

Student loans have seen almost 157 percent in cumulative growth over the last 11 years. By comparison, auto loan debt has grown 52 percent while mortgage and credit card debt actually fell by about 1 percent, according to a Bloomberg Global Data analysis of federal loans.

All told, there’s a whopping $1.5 trillion in student loans out there (through the second quarter of 2018), marking the second largest consumer debt segment in the country after mortgages, says the Federal Reserve.

And the number keeps growing. Student loans are being issued at unprecedented rates as more American students pursue higher education. But the cost of tuition at both private and public institutions is touching all-time highs, while interest rates on student loans are also rising.

Students spend more time working than studying. (Some 85 percent of students now work paid jobs while enrolled.)

Experts and analysts worry that the next generation of graduates could default on their loans at even higher rates than in the immediate wake of the financial crisis.

“Students aren’t only facing increasing costs of college tuition; they’re facing increasing costs of borrowing to afford that degree,” said John Hupalo, founder and chief executive of Invite Education, an education financial planner.

Federal student loan debt has the highest 90-plus day delinquency rate of all household debt. More than 1 in 10 borrowers is at least 90 days delinquent, while mortgages and auto-loans have a 1.1 percent and 4 percent delinquency rate, respectively, according to Bloomberg Global Data. While mortgages and auto loans have seen an overall decrease in delinquencies, student loan delinquency rates remain within a percentage point of their all-time high in 2012.

Delinquencies escalated in the wake of the Great Recession as for-profit colleges pitched themselves as an end-run around low-paying jobs, explained Judith Scott-Clayton, a Columbia University associate professor of economics and education. But many of those degrees ultimately proved useless, leaving graduates with debt they couldn’t pay back. Students attending for-profit universities and community colleges represented almost half of all borrowers leaving school and beginning to repay loans in 2011. They also accounted for 70 percent of all defaults. As a result, delinquencies skyrocketed in the 2011-2012 academic year, reaching 11.73 percent.

Today, the student loan delinquency rate remains almost as high, which Scott-Clayton attributes to social and institutional factors rather than average debt levels. “Delinquency is at crisis levels for borrowers, particularly for borrowers of color, borrowers who have gone to a for-profit and borrowers who didn’t ultimately obtain a degree,” she said, highlighting that each cohort is more likely to miss repayments on their loans than other public and private college students.

Those most at risk of delinquency tend to be, counter-intuitively, those who’ve incurred smaller amounts of debt, explained Kali McFadden, senior research analyst at Lending Tree. Graduates who leave school with six-figure degrees that are valued in the marketplace like post-graduate law or medical degrees usually see a good return on their investment.

Hupalo agreed. “Students need to get a job that allows them to pay off their debt. The delinquency rate will rise as long as students aren’t graduating with degrees that pay back that cost,” he said.

The cost of borrowing has also risen over the last two years. Undergraduates saw interest on direct subsidized and unsubsidized loans jump to 5 percent this year — the highest rate since 2009 —while students seeking graduate and professional degrees now face a 6.6 percent interest rate, according to the U.S. Department of Education. (The federal government pays off interest on direct subsidized loans while a borrower remains a student or if they defer loans upon graduation, but doesn’t cover interest payments on unsubsidized loans).

The deepening student debt crisis isn’t just bad news for students and recent graduates. The delinquencies that come with it may have a significant negative impact on the broader economy, the Fed chairman told Congress earlier this year.

“You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life,” Powell testified before the Senate Banking Committee in March. “As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth.”