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Graduated problem

28 Nov 2012 By Robert Cyran, Daniel Indiviglio

The trouble U.S. graduates are having keeping up with payments on student loans is casting doubt on their value. If pricey education provided the hoped-for labor market edge, then 11 percent of student loan balances shouldn’t be delinquent. The proportion of debt in difficulties has surpassed even late payments among credit card users. Students may need better vetting.

Payments at least 90 days past due jumped to a new high of 11 percent of the nearly $1 trillion of reported balances in the third quarter, according to the New York Federal Reserve – up from 9 percent three months earlier. That level of trouble is now higher than for other major consumer loans types, just edging out credit cards for the first time. Moreover, student loan balances have increased by a wild 81 percent over the past five years, even as the total for other consumer debt fell by 11 percent.

At least delinquent former students seem to have learned something about logic. It makes sense that default rates on education loans should be highest of all these types. You need your car to get to work – and you can sleep in it if necessary. That’s why delinquency rates are lower on auto loans than mortgages. Then come credit cards, used mostly for discretionary spending. The worst payment record is for student debt. After all, that degree is hanging on the wall already, and nothing is going to change that.

But the broader implication is that more and more graduates’ costly tuition is failing to bring them jobs that pay enough to cover their loan payments. That discredits the conventional wisdom that post-secondary study always pays off. The United States may even have reached a point where either the supply of degrees outweighs the demand from employers, or the financial benefits of higher education no longer cover its rising price.

There’s a partial resemblance to subprime mortgages during the pre-2008 housing bubble. Lenders don’t fear student loan losses, because the debt is difficult to discharge in bankruptcy. And the government backs education loans without ensuring that borrowers are likely to repay, so prudent underwriting isn’t important.

Maybe that needs to change. Borrowers of high-school age might not have much of a credit record, but loan officers could start looking at young borrowers’ test scores, character and ambitions as well as his or her place and course of study. Without some effort to make loans only if they are likely to be repaid, student debt might be the next candidate for a federal bailout.


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