As rates and tuition rise, America’s student loan debt crisis could get much worse

While Wall Street and President 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 costs 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% cumulative growth over the last 11 years. In contrast, auto loan debt has grown 52% while mortgage and credit card debt actually fell by about 1%, according to a Bloomberg Global Data analysis of federal and private loans.

All told, there is $1.5 trillion in student loans out there (through the second quarter of 2018), making it the second-largest consumer debt segment in the country after mortgages, according to 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 are spending more time working instead of studying. (Some 85% of current 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 officer of Invite Education, an education financial planner. “That double whammy doesn’t bode well for students paying off loans.”

Student loan debt currently 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% and 4% delinquency rate, respectively, according to Bloomberg Global Data. While mortgages and auto loans have experienced an overall decrease in delinquencies since 2010, 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 colleges and community colleges represented almost half of all borrowers leaving school and beginning to repay loans in 2011. They also accounted for 70% of all defaults.

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.

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

“There’s a systemic problem in the student loan market that doesn’t exist in the other asset classes,” Hupalo said. “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.”

The cost of borrowing has risen over the last two years. Undergraduates saw interest on direct subsidized and unsubsidized loans jump to 5% this year — the highest rate since 2009 — while students seeking graduate and professional degrees now face a 6.6% interest rate, according to the U.S. Department of Education.

(The federal government pays off interest on direct subsidized loans while borrowers remain students, or if they defer loans upon graduation, but it doesn’t cover interest payments on unsubsidized loans.)

“If you’re in an interest-based plan, you see cost go up, which worries me for students who are in school and have seen debt go up before they’ve even finished,” Scott-Clayton said. She said borrowers with smaller amounts of debt — those most at risk of default — should take advantage of income-based repayment plans, if they can.

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, Fed Chairman Powell 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 young adults struggle to pay back their loans, they’re forced to make financial concessions that create a drag on the economy. Student debt has delayed household formation and led to a decline in home ownership. Sixteen percent of young workers aged 25 to 35 lived with their parents in 2017, up 4% from 10 years prior, says Bloomberg Intelligence.

Ira Jersey, chief U.S. interest rate strategist for Bloomberg Intelligence, doesn’t think the student debt crisis is as severe as the subprime collapse of a decade ago. “Even though it’s a crisis in that it increases the deficit, and taxpayers have to pay more over time, it doesn’t present a systemic financial sector risk like mortgages in 2007,” he said.

That doesn’t offer much consolation to students. To quell fears of delinquency, Scott-Clayton said students should be proactive in researching different repayment plans.

“You have to wonder if the lack of transparency surrounding [student] loans is intentional,” she said. “Students shouldn’t assume their loan servicer has their best interest in mind.”