Have you ever asked your mirror how student loan debt stacks up to the recently popped housing bubble that helped drive the Great Recession? Probably not, unless you have a Snow White mirror on your wall.
But if you are curious, Moody's Analytics has the answer: The rate of growth in tuition far exceeded real estate appreciation even during the housing bubble. That's just one of the interesting nuggets in "Student Lending's Failing Grade," a new report in which the staid agency warns that "[f]ears of a bubble in educational spending are not without merit."
Student loans have grown at double-digit rates throughout the last decade. And while that growth has slowed in the last two years, it remains above 10 percent at a time when there has been a decline in every other form of consumer lending. (Here's a graphic illustration of the growth of student loan debt compared to other household debt.)
[Learn more about student loans.]
Moody's points to a few fundamental features that distinguish student lending from other consumer lending as the reasons for this continued growth. First, there has been a demographic increase in the number of 16- to 24-year-olds. Because approximately 40 percent of high school graduates seek some form of higher education, the demand for student loans to finance that education has grown as well. Second, the cost of tuition and fees has more than doubled since 2000 and, at the same time, colleges have asked students to borrow more because of the decline in endowments and the easy availability of government and private loans. A third reason is the growth of for-profit schools in the last decade.
According to Moody's, the volume of student lending will rise at a faster rate in the future because of rising costs. (Although the rate of tuition growth might slow as students explore cheaper options such as attending community colleges, online education, and electronic textbooks.) More significant, however, in forecasting a future bubble is the anticipated rise in delinquency and failure rates (this is not news to regular readers of this blog) as graduates find their incomes are insufficient to allow them to meet their repayment obligations.
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As Moody's warns, "[u]nless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place." And, if the rewards of a higher education continue to fall and required educational debt burdens continue to rise, Moody's foresees a future in which fewer people may invest in a college education. In the long term, a less educated and therefore less productive workforce would put the United States at a competitive disadvantage.
So is this a bubble that will ultimately burst? There are things that could prevent it. For example, if federal loans become more available, more people with high educational debt will be eligible for repayment plans such as Income-Based Repayment and able to earn Public Service Loan Forgiveness. (If you want to learn more about how to qualify for these options, sign up for one of Equal Justice Works' free webinars.)
On the other hand, recent actions like the elimination of subsidized Stafford loans to pay for Pell grants mean many students will accrue higher amounts of educational debt while they are still in college. And there is concern that the "super committee" forged as part of the debt ceiling agreement and charged with cutting over $1 trillion from the federal budget may reduce the tax breaks that offset the cost of college and or raise the interest rates on federal student loans.
[See U.S. News's Paying for College guide.]
In the meantime, we suggest looking in the mirror and making sure you are in control of your financial future. A few things you can do that we've talked about recently are making sure you consider cost when choosing a college, taking out federal loans, and controlling your spending while you're in school. You can also visit the Educational Debt Relief section of our website and keep up with the latest in educational debt relief news by following us on Facebook and Twitter. We post weekly tips and updates under the hash tag #studentdebthelp.
Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.