More Than 40% of Student Borrowers Aren’t Making Payments

Honestly it kind of reminds me of the whole Yelp minimum wage thing. Person knowingly takes a minimum wage job in the most expensive city in the world and is surprised a year later when that wasn't very much money and they're struggling. The simplest cost of living calculations would have said "moving to that city and taking that job is a really bad idea."

This isn't to say that there aren't things that need to change. Education reform is necessary as well as a living wage, but I'd also argue that basic financial literacy is also a requirement for being an adult and should be treated as such.

Ha! There is a bit of a hypocrisy there -- if big banks / companies piss away money and choose to strategically default then (and some even get bail-outs), it is just business. If people do it for whatever reason, well clearly the are immoral, deficient somehow, their psychology needs to be studied by a special committee.

> Some borrowers aren’t repaying even when they can.

Yap, makes sense. They see banks get bailouts, why shouldn't they get bailouts. Now maybe they shouldn't have been allowed to borrow to start with. But maybe so shouldn't have banks and insurance companies been allowed to leverage to unsustainable levels.

> The singular goal of our student loan program is to help all students get a degree that sets them up for success

One a separate note, that needs to be reviewed and re-evaluated. There are deeper issues here. Simply handing out billions of dollars for degrees like Masters in Basket Weaving from Phoenix University cannot possibly be seen as solution to anything (except well, handing out tax payer money to Phoenix University...)

On the one hand, we tell them that everyone has to go to college and that more education is better. Regardless of whether more education has any financial return. Is that the only metric? Absolutely not, but there is a point at which education is a luxury.[1] My entire high school education was focused on how to get into the "best" college.

On the other hand, in order to get that education, they have to take out significant loans. At 17 or 18, they have little to no understanding of—let alone, ironically, education—about personal finance.

So financially uninformed take on large amounts of debt with no gauge of whether that is a positive investment. Sound familiar? We did the same thing to uninformed mortgage buyers until they started to default in 2007.

[1]: I say this having majored in Philosophy. It was a luxury that, coincidentally, is immensely valuable. At the time, however, I didn't know that, I was just interested.

I don't know if there is much of a CDO/CDS market anymore for student-loan debt because subsidies ended some years ago. Lending standards have probably tightened as a result, but it's possible that there are some student-loan backed securities out there with a high probability of default.

I've thought about shorting Navient/Sallie Mae directly, but their ties to the federal government make me think that they could possibly benefit from a government bail-out or takeover if it came to it.

There's also the possibility of taking a short position on the for-profit education industry. Institutions (or rather Companies) like DeVry and University of Phoenix probably have some of the highest debt and default rates. If they lose federal funding, their future is grim.

“We obviously have not cracked that nut but we want to keep working on it,” said Ted Mitchell, the Education Department’s undersecretary. He said many defaulted borrowers dropped out of school and are underemployed.

This is surreal. Could they be any more patronizing?

[1] http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objecti...

It isn't a right. When you become an adult you make choices, choices that come with responsibility to your self and others. This does not include demanding others support your flight of fancy, let alone one that may never pay out or benefit anyone other than the person taking the money

General loans work pretty well out there: Loan costs are aligned with loan risks, because nobody wants to loan money to those that can't pay. But student loans are guaranteed by the government, so for all intents and purposes, anyone can get a loan, whether they'll be able to pay it or not. At the same time, it never goes away, and it's given to people who probably still live with their parent. They bear a bigger risk than I do with my mortgage, but they might get tens of thousands of dollars in debt without deciding on a major first!

What really makes this pernicious is that, since everyone gets access to the loans, in practice, this means college can be far more expensive than it'd be otherwise: Without all the loans, most colleges would have to be cheaper. Same thing if colleges also bear the risk of non-payment. And it's not as if this money is being spent enriching teachers: It's mostly administration and facilities.

So now we have a system where everything is very expensive, and most students get huge loans that they can't afford, and where ultimately, the taxpayer will end up having to foot the bill: The only winners here are the universities themselves.

Just think of what this is doing to medical schools and law schools: They know that even the poorest student will be able to max out on their loans! So dropouts, and in the case of law school, graduates that went to the wrong school end up in a worse situation than they would have been 30 years ago.

The country must choose: Either stop giving money to private colleges, and just focus on good, cheap, no loans, public universities, or let people pay for their own college with no guaranteed loans: Less people will even go to college, but those that do will afford it, because colleges would have to adapt to lower budgets.

Guaranteed loans to pay for expensive, private universities? This just makes sure that millennials will end up worse off than their parents for the first time since the industrial revolution.

Let's assume you actually do end up bettering your life by taking out student loans and getting a degree. Although it seems almost memetic these days that you'll sink 100k into a school and wind up flipping burgers, in my situation it was actually the opposite. I was a cook for a catering business making very little money such that my federal tax burden was virtually nonexistent. After finishing school I make quite a bit more money, but I'm paying very high student loan payments (not complaining really, I was aware this would be the case) and the interest on my student loans is higher than on my mortgage! These are federal loans as well, not private.

By providing me a loan the government has essentially won! They've turned a tax burden into a source of revenue. My lifetime earning potential is much, much higher than when I did not have a degree and was working as a cook. Why are some of these interests rates as high as 6%? It seems insane!

Who thought a $25,000/year(and rising) public university education was a good idea ?

I thought "default" is technically impossible with respect to student loans, your solvency matters not, you're obligated to pay it off even if takes your entire life (and/or life's earnings)?

This problem would get fixed very quickly if students were allowed to actually default on the loan and stop paying it, at which point it becomes a loss to the lender, like it is with any other loan. Then these loans wouldn't be handed out like candy to people who are not mature enough to understand what it takes to pay off $100K and thereby ruining their lives.

edit: Also, in the UK, once you do earn enough, payment is automatic via deductions from payslips.

More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay.

The new figures represent the fallout of a decadelong borrowing boom as record numbers of students enrolled in trade schools, universities and graduate schools.

While most have since left school and entered the labor force, 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1, according to a quarterly snapshot of the Education Department’s $1.2 trillion student-loan portfolio.

About 1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt, meaning they had gone at least a year without making a payment. Three million more owing roughly $66 billion were at least a month behind.

Meantime, another three million owing almost $110 billion were in “forbearance” or “deferment,” meaning they had received permission to temporarily halt payments due to a financial emergency, such as unemployment.

The figures exclude borrowers still in school and those with government-guaranteed private loans.

The picture has improved slightly from a year earlier, when the nonpayment rate was 46%, but that progress largely reflected a surge in Americans entering a program for distressed borrowers to lower their payments. Enrollment in those plans, which slash monthly bills by tying them to a small percentage of borrowers’ incomes, jumped 48% over the year to 4.6 million borrowers as of Jan. 1.

The Obama administration—worried about taxpayer costs and the prospect of consumers damaging their credit by defaulting—has stepped up efforts to reach borrowers and offer options to enroll in the income-based repayment plans. In some cases, the government is garnishing wages and tax refunds of borrowers who refuse to pay.

But officials acknowledge that a large pool of borrowers have essentially fallen off the radar. Loan servicers—companies the government hires to collect debt—say they can’t reach such defaulted borrowers despite hundreds of attempts through phone calls, text messages and emails. The Education Department has assembled a “behavioral sciences unit” to study the psychology of borrowers and why they don’t repay.

“We obviously have not cracked that nut but we want to keep working on it,” said Ted Mitchell, the Education Department’s undersecretary. He said many defaulted borrowers dropped out of school and are underemployed.

Carlo Salerno, an economist who studies higher education and has consulted for the private student-lending industry, noted that the government imposes virtually no credit checks on borrowers, requires no cosigners and doesn’t screen people for their preparedness for college-level course work.

“On what planet does a financing vehicle with those kinds of terms and those kinds of performance metrics make sense,” he said.

Some borrowers aren’t repaying even when they can. Research from Navient Corp., which services loans for the government, shows that borrowers prioritize other bills—such as car loans, mortgages and heating bills—over student debt. A borrower who fails to pay down an auto loan might have her car repossessed; with student loans, there is no such threat.

Kristopher Mathews, 38 years old, is in deferment on about $11,900 in federal student loans. During the recession he earned a certificate at a Michigan-based for-profit college that teaches media arts, but he wasn’t able to find the well-paying job in radio that he hoped for.

Mr. Mathews now works as a logistical analyst for a U.S. auto company, making $46,000 annually. He says he devotes his income to caring for his family—he and his fiancée have three children—and then paying off two credit cards and a car loan. “With all the other necessities in life I just don’t have” funds to pay the student debt, Mr. Mathews said.

Once his deferment expires, he isn’t sure if he will feel obliged to pay down his loan. “They promised me everything,” he said of his for-profit college. “And I honestly have nothing to show for it except a piece of paper that doesn’t really do me any good.”

Most borrowers who have defaulted owe relatively little—a median $8,900, according to the Education Department.

Advocacy groups, some members of Congress and the federal Consumer Financial Protection Bureau have faulted loan servicers for not doing enough to reach troubled borrowers to offer repayment options. But the picture is more complicated.

Navient, which also services private loans, says it attempts to reach each borrower on average 230 to 300 times—through letters, emails, calls and text messages—in the year leading up to his or her default. Ninety percent of those borrowers, which include federal borrowers as well as those who hold private loans, never respond and more than half never made a single payment before they defaulted, the company says.

The administration maintains that the student-loan program, as a whole, will generate a profit over the long term, but the risk is rising that the revenue won’t meet the administration’s projections.

Even many borrowers who are current on their loans are paying very little. More than a third of borrowers on an income-based repayment plan had monthly payments of zero because their incomes were so low, according to a Navient survey last year.

The Education Department, through private debt-collection agencies, garnished $176 million in Americans’ wages in the final three months of last year for student debt, federal data show.

The administration’s pursuit of troubled borrowers is drawing criticism from student advocates and their allies in Congress. Last week, the American Civil Liberties Union and the National Consumer Law Center sued the Education Department, accusing it of blocking public access to data on the agency’s debt-collection efforts. The groups suggested that the companies collecting debt for the department might be discriminating against black and Hispanic borrowers.

Dorie Nolt, a spokeswoman for Education Secretary John B. King Jr., said the agency is reviewing the groups’ public-information requests.

“The singular goal of our student loan program is to help all students get a degree that sets them up for success, and we take the treatment of our borrowers—particularly historically underserved students—very seriously,” Ms. Nolt said in an email.

Like any other industry, education needs to be unbundled. The idea that you need to live in a dorm, in a psuedo-society, for four years, taking a broad set of courses is dated and helps nobody but those offering that experience. I predict in a generation we'll have the people making hiring decisions more and more jaded about the value of these educations and less likely to keep perpetuating the myth that you need a degree from a school to do a job. Instead, we'll see more and more certification programs, or micro-degrees, specializing in subjects that matter to the student.

I believe it to already be happening - I don't look at education except as an afterthought when reviewing resumes. I don't have a degree, and I'm doing well in my field. The types of jobs where I've ever been discriminated for not having a degree I don't think I would have enjoyed anyway. Working at a 5000 person company that cares more about your score on an HR system than what you could really offer them? No thanks.

Adding on the military expense etc, the country is so totally financially broken. How sad.

Most undergrads (more than 50% less than 80%) spend 4 years doing enough to get by, and do a lot of socializing. This is cheap at in state publics, expensive otherwise. The people who get in-demand majors are fine no matter what. Those with other majors who really apply themselves need grad school and more debt to break out.

An English major at Yale or an in state school is fine. The Yale student will manage no matter what. The in state person got off cheap. Everyone else he an expensive lesson in literature.

Despite that, life in most fields is much tougher without he degree.

The guidance counselors are partially wrong in suggesting loans for overpriced schools. They are also wrong for suggesting soft majors at mediocre schools.

That's 17 out of 20 in default - a massive 85%. Some of them were actually not in a situation where they could pay back the loan. Others didn't want to. This was the situation at that single bank branch. Don't want to imagine how large the total default amount must be.

first time i saw this[0] all kinds of warning bells went off. im sure there is a way forward so that people can learn and share the value created from software development job market but i think we should move fwd carefully. ppl will definitely get fd over.

but yea most of those 'for-profit' colleges are totally shady.

do they have everest college in the US? perfect example of this kind of bs. in canada they got shut down, but not before screwing over tons of people out of their money for years[1].

[0]: http://www.inc.com/maria-aspan/max-levchin-affirm-better-stu...

[1]: http://www.cbc.ca/news/business/everest-college-closure-no-s...

The loans push money to unsophisticated buyers (kids and their parents), who use it to make a huge amorphous transaction which is only performed once in their lives and plays out over years. There's insufficient buyer information to provide price discrimination for the asset being purchased - so it's just inflating college prices.

On the other hand, if we took the same amount of money and goverments directly funded public schools - there's a lot of attention over time and many transactions that can be administered by a gov't department to provide funding discrimination and control over the quality of what is provided. (BTW this is how many low cost public schools were funded in the boomer generation... at least in California)

Edit: BTW, Does any reader here know of any interesting economic theory on how to predict if a market will act efficiently? I'm imagining there must be some way to model the structure of a given market with information, quality and quantity of transactions between nodes representing persons/companies/institutions in a market.

However, apparently, if your salary is above a certain threshold, you don't qualify for education deductions and credits.

It's a first world problem, I know, but I just found out and it kind of sucked.

This converts receivables into cash by selling them a third party at a discount. This doesn't prevent the educational institutions from getting their cash.

Not sure how it works in the US.

You bring up a really interesting point, my buddies and I have been mulling this over.

Three important distinctions between student loans and mortgages:

Mortgages are backed by an underlying asset (the house) for which there is a liquid market and transparent price discovery, so it's easy to determine when the borrower's position is insolvent (i.e.; loan balance > home value; negative equity)

For many student loans, the Federal government assumes the risk of default; also, Sallie Mae dominates the secondary market, and shorting them entails political risk (you're betting against a bailout)

While painful, defaulting on a mortgage is a realistic option for borrowers: declare bankruptcy, give up the house keys to the bank, have shitty credit for 7 years, and you're out from under it; by contrast, student loans survive bankruptcy (and the principal keeps growing)

Student loans are far more insidious precisely because it is difficult for the market to take a natural short position and put downward pressure on prices. What would a bubble 'pop' look like? For housing, the slow-down/decline in home prices simultaneously bankrupted hundreds of thousands of over-leveraged owners.

It's hard to imagine a scenario where a significant portion of student loan borrowers simultaneously stop paying, and even if they did the loan owner can chase them through bankruptcy and garnish their wages. That looks like a recipe for a long, slow, toxic drag on the economy.

https://www.reddit.com/r/finance/comments/3y39x2/just_saw_th...

First of all, I think it demonstrates that American university tuition is way too high. So much of that money goes toward things like sports teams, climbing walls, emotional support dogs, and other things that just don't have to be a part of the college experience. American universities have an unbelievable amount of staff that isn't about education or research.

The thing is, there's little incentive for universities to cut back, because no matter what they charge, they have willing customers. And those customers aren't paying the bills -- not at the time of purchase, and perhaps never at all (as this article states).

Secondly, the notion of work -- not work-study programs, but real work -- should probably become more prominent among US students. In Israel, where I now live, most students work at part-time jobs, and juggle both work and school. It's not ideal, especially since many of them also have families, but it does help to keep debts relatively low.

Thirdly, I think that it's too easy to take out loans. I took out loans for my undergraduate degree, and was fortunate to pay them back within a few years of graduating. I then took out loans for my PhD, and while I've been managing to pay them back faster than expected, no one ever asked me at the time, "Are you sure you'll be able to pay these back?" A bit of discussion at the time of taking out loans, and looking at options, or even giving financial counseling, might have helped me or others to take out less.

Finally, the notion that you cannot ever get rid of your government-sponsored tuition loans is crazy. I'm not saying that people should declare bankruptcy at the drop of a hat, or that there shouldn't be consequences. But people have issues, and excluding student loans from bankruptcy -- which is intended to give people a new start -- seems extremely unfair to the people who need this tool most of all.

No wonder people are just not paying their loans back; if declaring bankruptcy isn't an option, and they can't pay, then they'll just not pay.

Meanwhile $200 billion is the cost of two-months in Iraq.

- Lend them money with false advertising and without making sure they understand what a loan means

And now they want them to repay? Humans are not rational actors, certainly most aren't. No 18 year old knows the repercussions of a six-figure debt.

Let's just admit those three facts, and then we can start to have sane policy discussions.

I suppose it's the same logic that argues the U.S. Federal government can never become insolvent (as it's the world's reserve currency and can simply print money to pay off it's debts).

http://www.salon.com/2014/06/08/colleges_are_full_of_it_behi...

This Salon article says:

“Tuition is up 1,200 percent in 30 years. Here's why you're unemployed, crushed by debt -- and no one is helping:

“Reading back over journalistic accounts of the tuition spiral from the ’80s and ’90s, you get the impression that all concerned felt it was a wee bit uncouth to dig too deeply into a university’s pricing practices or suspect the sachems of higher learning who presided over them of anything inappropriate. These were the journalists’s beloved alma maters, after all: surely they had our best interests at heart. …

“And so, beginning in the ’80s, university administrators, their words dutifully transcribed by journalists, blamed utility bills for soaring tuition. They blamed libraries, which made a certain amount of sense until libraries went dramatically out of fashion in the Internet age—and yet still tuition prices went up.

“They blamed professors, of course, since professors are the most visible part of a university and because it’s easy to hate professors … until the outside world figured out that universities were actually using graduate students and adjuncts to teach their courses and yet still tuition prices were mounting at an insane clip.

“Administrators also blamed tuition inflation on onerous government regulations … On society … on declining student population …

“Unlike tenured faculty, university administrations actually have grown by 369 percent since the mid-1970s. … But blaming administrators proved difficult for journalists, perhaps because administrators were the very people journalists had been going to for explanations in their tuition-outrage stories. Could their sources actually be the culprits? No way. And so, less than a year after the Inquirer’s series appeared, USA Today ran its own big tuition-shock tale in which the blame was pinned on all the familiar blame-objects: Professors, student demands, technology, gummint regulation. A 1997 cover story in Time magazine—‘How Colleges Are Gouging U,’ the illustration shouted—barely mentioned administrators at all.

“What were journalists to do after ringing the alarm bells for so many years without effect? Well, there was one easy answer to this frustrating situation: To discover that there wasn’t really any problem in the first place. That the tuition spiral was entirely reasonable, even if no one could actually explain it. How so? Well, if you examine what has come to be called the 'college wage premium'—the difference between what is earned by college grads and high school grads—it becomes clear that someone who finishes four years at a university will eventually earn far more than they spent to go there, even at the crazy tuition prices of recent decades. Today this is a universal way of considering the situation, always leading us to conclude that going to college is 'worth it'; that it is a 'bargain'; that it 'pays off.' But it only seemed to enter journalists’ consciousness in the 1990s, as on the occasion when Gaston Caperton, president of the College Board, explained matters thusly to the Los Angeles Times in 1999:

“He said there has been too much focus on the cost of college and too little on the lifetime returns for four years of investment. Because a college graduate today earns about twice as much as a worker with only a high school diploma, he said, ‘a college education is worth about $1 million over a lifetime.’

“The mind reels when confronted with this kind of smugness. One wonders: Is there some identifiable aspect of a college education that yields that million dollar prize—exposure to advanced literary theory, for example? Is there a way to isolate that particular 24-carat nugget and leave the dross behind—all the plush dorm carpeting and the many layers of assistant deans? My guess, though, is that Caperton’s statement meant exactly the opposite of this—that there was no need to inquire any further about the tuition outrage. What it implied, by extension, was that since we now know the final value of a college degree (one million dollars!), the colleges can simply keep raising tuition prices and student indebtedness until they have extracted that amount from their graduates—and only after they have hit that figure will we have cause to complain.”

My girlfriend is 21 years old and just a couple of years out of high school. I can only recall being taught the basics myself: how to make a budget, balance a checkbook, etc. She apparently did not even receive that.

I'm much older than her (37) and, while I'm certainly not "rich" by any means, I'm financially stable and everything I own is completely paid for (ironically, my only remaining debt is my student loans).

She has only recently became interested in the basics of financial matters, such as her credit report and credit score, how loans and credit cards work, etc. Initially, I was amazed at her lack of knowledge in this area. It's not that she's dumb or stupid, she was just never taught anything about finances. She is, fortunately, relatively mature for her age and manages her money well. She has worked since she was first able to and has maintained steady employment and, for some reason, lately acquired an interest in her credit score and increasing it (although it's actually pretty decent for her age).

So we've recently started working on her credit history which, of course, was completely non-existent until she took out a small loan from her credit union for a cheap, used vehicle (with her father as a co-signer) about a year ago. She shops at Victoria's Secret often, so we got her a store credit card from there with a small ($500) credit limit to help her started. I've explained how credit utilization, payment history, etc. factors into her score, so she'll put her purchases (always < $100 for a statement period) on her card and then pay it off in full every month and I've been looking around recently for a good "starter" credit card for her to get. I've considered adding her as an authorized user to one of my high-limit Amex cards (to give her utilization, payment history, and average age of accounts a little boost) but I've read recently that nowadays those accounts don't get reported to an AU's credit report (although AmEx does ask for SSN and DOB when adding an AU so maybe they still do).

She completed a vocational program in high school and is already a licensed cosmetologist; we've talked a bit about whether she'll go to college or not (she's already somewhat "behind", in that she didn't go straight to college after high school) but not how it will be funded if she does. If or when that time comes, I'm glad that I'll be around to help her come up with a plan that won't require her to spend the next 20 years paying for it. I can easily see how a typical 18-year-old about to go off to college just blindly signs up for student loans without any true understanding of just what they're committing to financially and without any idea of how long after they complete their education that it will continue to them.

TL;DR: I got kinda sidetracked there for a minute but my point was that today's high school students receive nearly zero financial education or guidance before heading off to college. I am not surprised at all by the facts and figures detailed in this article.

https://blendle.com/i/wsj-com/more-than-40-of-student-borrow...

A college education is a major investment. It's sad that culturally, our financial education is this poor.

I majored in a science and had all of my debts paid off within 5 years. I have friends that majored in things like history and still haven't paid their debts off after 10 years.

The popular thing to to is blame society, the university, or even high school teachers for recommending someone go to college. But, students need to take personal responsibility for taking out a loan and being unable to pay it back.

When this happens, we will have less students making foolish decisions.