Canary in a Coal Mine?
The student loan default rate has jumped up in the last year, according to an Education Department announcement today. The rate increased from 4.6 percent to 5.1 percent.
It's true that -- as Education emphasizes in its press release -- 5.1 percent is a low number, at least by historical standards. It is the second-lowest rate in the last 20 years.
At the same time, the jump is the largest increase since 1990. It is a worrying sign that greater troubles for students could be ahead.
As regular readers of Warren Reports know, the volume of college loans has skyrocketed in recent years. We haven't seen the full impact of those debts because interest rates have been so low.
But we are no longer so lucky. The interest rate on student loans has doubled in the last two years.
Moreover, the default story is worse than the headlines imply. The 5.1 percent default rate is the number of students who default within a year or two of beginning repayment. Many more students default later on. In fact, about 12 percent of loans made this year are projected to eventually default (see p. 366 of this OMB document).
Today's news could be the canary in a coal mine, signaling that much greater problems of student debt affordability are right around the corner. It's time to take the problem seriously.
A made an extended comment about this post on my blog.
Satellite Sky Blog
Find the Truth. Do Justice.
September 13, 2006 8:27 PM | Reply | Permalink
I know this doesn't appear practical on the surface, but students would be wise to consider a piece of wisdom taken from Proverbs in the Old Testament Scriptures.
Prov 22:7
7 The rich rules over the poor,
And the borrower becomes the lender's slave.
NASU
This holds true no matter how you justify borrowing. You can make economic arguments all day long about why students must borrow for school, and they sound logical and practical. But this piece of wisdom still holds true, on a microeconomic and macroeconomic level. Student loans teach students to be borrowing consumers. It makes debt seem like a wise financial planning tool. It leads to more borrowing, and eventually a lifetime of financial bondage.
Jim Anderson
The Truth About Credit
September 14, 2006 8:17 AM | Reply | Permalink
There are a lot of dead canaries currently in Academia. The reality is with exceptional GPAs/degrees and even the top fellowships, graduate school stipends keep one in abject poverty and the time to obtain a PhD has gone often from 3 years to 8.
Then through labor arbitrage methods of professional careers people who that neck deep in dept are simply choosing to study in fields guaranteed to make the income to pay back the massive debt, such as law, Medicine. Teaching, Science and especially Engineering and Computer Science are simply not studied before the risk is much too great to not have a high income (or any in many cases) upon graduation and this is even from a top tier university.
September 16, 2006 9:16 PM | Reply | Permalink