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Tuesday, March 06, 2012

Oh, Yeah, Student Loans

The topic has come up pretty frequently here, so I thought blog participants might be interested in the Liberty Street Economics writeup and analysis. They try to back out student loans that are not currently in payment schedules to derive a true high delinquency rate, and this is what they came up with:


I found this quite interesting because at the beginning of 2011 I went through it and figured that about 30% of these loans would not be repaid. That was on the total balances, and did not include the Obama "executive action" which curbs lifetime repayments.

This is a totally different way of looking at it, but it did come up with 27% delinquencies. I figure a longer term rolling rate of 19% delinquencies but 30% writeoffs.

Another way to look at the risks is to figure how many loans will succeed in paying down the principal balance at an average 4% annual rate. If not, you figure writeoffs. Here's the part that addresses (or rather doesn't) address this:
To address this potential bias in calculating delinquency statistics, we exclude individuals who appear to be temporarily exempt from making payments because they are in school or newly graduated from school. These are students who, as of third-quarter 2011, owed as much as or more than they did in the previous quarter while maintaining a zero past due balance. We will be able to make our inference more precise when loan-level panel data are available, but this is our first-cut analysis given the available data. We warn that there is room for misclassification in this analysis. For example, there could be borrowers who are subject to the income-based repayment plan whose payment fell short of the accrued interest, resulting in a balance that increased. Recall that this exercise looks at the student loan borrowers who have a balance as of third-quarter 2011; therefore, those who had taken out a loan at one point but paid it off before third-quarter 2011 are not accounted for.
Once the larger balance student loans go into negative amortization (payments less than interest) for about seven years total you can kiss a good portion of the principal goodbye in about half the cases.

Once I reached that point (essentially this is taxpayer money being wasted) I abruptly became a hardliner on student loans. In my view this is predatory lending - the worst kind. Younger students are being gamed into getting the more expensive type of nonsense degrees. The money goes into the pockets of the education institutions. If you are going to college to study a field in which a degree has a high economic value, that's one thing. If you are going to school to get a degree because you need a degree, you are setting yourself up for a bad time with a creditor (Uncle Sam) who has a very long arm.

According to FRB NY, student loans outstanding in Q3 2011 totalled 870 billion - significantly more than CC debt. It is of course, still rising. If I am correct, then this is eventually going to add up to 300 billion extra federal deficit. That is close to as much as the Fannie/Freddie fiasco is costing, and it represents an overall loss rate much higher than for GSE-covered mortgages.

Other tidbits of interest in this report:


More than 10% of the US population has student debt. The amounts most of concern are from about 15K up, which are probably from 3.5 to 4% of the population (so far). The largest share of the overdue balances by age bracket is in the 30s:


The 40s and 20s are close to equal. Many of the 20s are not finished accumulating loans and thus haven't started repaying them yet, so they may age out into something like the 30s.

The fact that 34% of outstanding delinquent loan balances occur in those aged 30 and up is strongly suggestive that these have accumulated negative amortization periods. Student loan balance by age (all student loan balances):


So as these age the ratio of delinquent/outstanding balances go higher. Students under 30 have 33.9% of the loans, but only 25% of the delinquent balances. Students (or erstwhile students) in their 40s have 16.4% of the total loans outstanding, but 23.1% of the delinquent balances.

By any standards, student loans are the worst-performing category of US consumer debt.

Comments:
My lord, who has delinquent student loans at age 60? I suppose these must be people who borrowed money for second-career training? Are we going to turn around and subsidize their dinners of cat food surprise in a few years? Don't mind me, I'll just be in the corner mumbling about neo-slavery.

Sadly, I don't need explanations for the 40+ bracket. I know some of them--those BA degrees just didn't quite pay off.
 
I think this is entirely apropos of a comment I had been thinking of making.

I assume you've seen the FHA give-away, timed rather nicely with the new and improved HAMP/TBTF robo-foreclosure settlement? Conspiracy?

As for the student loan scheme, whereby academics get their lavish sinecures, while students get crushing debt and taxpayers get stuck with the write-downs: conspiracy?

So then, GM running a more than a little flush on their dealer inventory into and through the election year, conspiracy?

I suppose some may wish to define terms, but I believe every one of these is ultimately the same: short-term interests of wealthy elites making policy that is not in the interests of the lower 90% on the wealth and income distributions. But don't call it a conspiracy?

OK, but how's that Shakespeare go, "a steaming heap of dung by any other name doth stench as foul?" :-)
 
Oh yeah, forgot to add... by some strange cosmic coincidence Sailer had an interesting post on conspiracy theory just last night.

That'd surprise me if he's a lurker here. :-)
 
The 60 year old with the loan would be me. Expect to see more of us, since we are being told to go back to school for retraining whenever our current career disappears. If the tech bust hadn't occurred, I would have paid mine off since it was for community college.

Sallie Mae wants people to default. There is no down side for them. You can't discharge the loan in bankruptcy. They can garnishe your social security money. They always get paid. They are trying to force mine into default even though I've made my payments on time for eight months now. I would need to pay an eighth of my loan to bring it current. (you can get them discharged if you die, although it took a year of my deferment time while waiting for them to discharge my husband's part of the loan. )
I feel extremely sorry for the young people struggling under these crushing debts. In my lifetime, we've gone from being able to pay off a house or an education to being a debt slave for the rest of your life.
 
As for the student loan scheme, whereby academics get their lavish sinecures, while students get crushing debt and taxpayers get stuck with the write-downs...

Society also gets stuck with universities that view their students as a revenue stream. If I see one more resume where a great GPA is highlighted but-- upon inquiry-- standing in the graduating class is mediocre...

There is something to be said about the old City College model of making education nearly-free but failing half the students each class...
 
In my view this is predatory lending - the worst kind.

100% agree. That is what my father basically said to me in 1982. And he didn't cover any of my tuition (he did let me live at his house rent-free and board-free, and gave me a car worth 1K). I did have a few thousand dollars from some savings bonds my grandfather put aside 11 years earlier - which would have covered one year of tuition at the school I wanted to go to. So I sucked it up, went to junior college and worked as many hours as I could to save up for the expensive school. Took me 5.5 years but I was debt-free and never had a car payment.

The best way to get out of the debt cycle is to never get in it in the first place. That was the most valuable lesson the old man ever taught me.
 
Allan - the landlord bailout scheme makes me want to vomit. I would need prescription medicine to be able to cover that one, or a whole lot of liquor.
 
Anon @ 12:47. There certainly is. Many of these students are not really academically qualified. You have people going to basic reading and math classes in secondary education. Give me a break.

We are not really doing the students a favor, and the loans are not going to be paid back, but we'll torture people for decades because otherwise 50% of the principal wouldn't be paid back.

I just don't see the morality of this. In a decent world, the federal government would crack down on the requirements for a college education for the gazillions of jobs that don't require one. Basic skills tests would cover the requirements for many of these jobs. You do not need a college education to be a fast-food manager.

We've created a legal situation in which companies have a high incentive to require a college degree for jobs that don't have any fathomable relation to it, and the government lets this slide because it is owned by professors.

As for grade inflation, good lord! If you breathe in law school, you can't make less than a 3.4. It's such a racket.

Best way to make a shitload of money nowdays is to acquire dirty skills, and become a mechanic or an craftsmen. There's money in fixing cars and installing wood stoves. There's no effing money in an undergrad psychology degree if you have to pay much for it.
 
At root is Duke v. Griggs.

But being an elite is never having to admit a mistake. So instead, like with the tax code, we pile on band-aid after band-aid until its a Rube Goldberg contraption incapable of being disassembled. There's one convenient lie after another allowing rent-seekers in the top 10% to make a buck, and the lower 90% gets screwed.

So from Duke v. Griggs employers have to defer to colleges to signal IQ. Going to college is not about learning, it's about buying a union card. The better the college you can get into, the better the career track (union card) you can get into. It's an arms-race the govt has aided and abetted.

As for paying your way through, entirely impossible nowadays. Immigrants and, pretty soon now, post-retiree's have gutted the low-end jobs and the tuition and fees have totally overwhelmed what can be paid for as you.

But so many benefit:
* employers now get free apprenticeships
* lenders get a revenue stream
* university staff get their cushy sinecures
* useful idiots get a market for their propaganda justifying it all with spurious correlations regarding college degrees and income
* Govt gets yet another aspect of people's lives to meddle and insinuate itself
 
I don't think it's really about Duke V Griggs. It's about the credential. If you have to demonstrate skill with a brief, directly-applicable test/demo, you'll mostly end up with guys in most kinds of work, desk-bound or otherwise.

If you just have to get a credential that is heavily grade-inflated and takes several years of boring makework to complete, you'll slowly get more women over time.

And in fact that is exactly what we see. Duke/Griggs is a red herring, because I have worked and known people working too many low-end jobs that did do the skills test, even for big organizations. But mostly, those jobs were 60-70-80 percent male.
 
Well, if I came out suggesting women entering the work-force was the ultimate conspiracy that did no one any good, MoM would really come after me. I understand she knows how to swing an axe. So I tread lightly.

As for Duke v. Griggs, it gave sanction and made official the whole mindset. From that point, it's been all downhill. Not to say the ruling going the other way would have necessarily turned the tide, far from it, but it signaled for all that cared the tide would not be turning. And obviously our disastrous immigration policy owes nothing to Duke v. Griggs, except that they are fellow travelers in the minds of useful idiots.
 
Don't forget that one of the "solutions" for unemployment is more school. People are allowed to draw unemployment as long as they are attending school. (Which is what I was doing when I had my student loans. And I guess that tech support does have more of a future than packing pears!) The problem is that tuition even at the community college level is too expensive. It's about $1250 a quarter at our local CC and that's for 15 credits. It doesn't take long to run up a debt that will be hard to pay off with the sort of jobs that are out there now.
 
Going to college is not about learning, it's about buying a union card.

There is something to be said about that. One of the things unions did in the 90's was screw future employees so they could keep the inflated pension benefits. Had a nephew take a union job after college but he gave up and went to grad school because he simply would not be given enough hours. He held out for about 2 years before he decided it wasn't worth it.

Still, I have two nieces, 22 and 20, who were able to get full-time assistant mgr retail jobs right out of high school which they used to pay for college which they had to delay/slow to accumulate some money. Granted, these jobs are in questionable neighborhoods but that's why there were available - the stores simply could not find enough competent help in the neighborhood and older workers demanded more money than the stores were offering. I'll grant those may be the exception, but I'm proud of them for taking the responsibility on themselves and seeing that debt is the wrong way to start.
 
It's about $1250 a quarter at our local CC and that's for 15 credits

I paid about $450 a quarter 30 years ago. Comes out to about a 3.5% annual increase, which seems about what the Fed has been inflating at for most of that time.
 
Thanks for a very great explanation,Government only balancing the student loan as of 2012 student loan increase a lot,and the credits is really bad.well thanks for sharing.
 
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