Magazine article The Hispanic Outlook in Higher Education

Student Loan Debt Unlikely

Magazine article The Hispanic Outlook in Higher Education

Student Loan Debt Unlikely

Article excerpt

Student loan debt outstanding in the United States is approaching $1 trillion. It surpassed outstanding credit card debt for the first time in 2011.

In the eight years between 2003 and 2011, outstanding student loan debt increased from approximately $250 billion to more than $900 billion, according to the Federal Reserve Bank of New York. It has outpaced the growth rate of outstanding debt for credit cards, auto loans and mortgages over the same time period. Tuition costs, governmental initiatives lo encourage binding for higher education (e.g., the Federal Direct Student Loan Program), an increase in for- pr oñt proprietary schools and a desire of recent graduates to seek a second degree when they are unable to find a full-time job are some of the reasons for this incredible rise.

Currently, student loan debt ranks second on the list of consumer debt in Ibe U.S. Nearly 8 percent of total debt outstanding as of year-end 2011 is made up of student loans. Although this figure looks small in comparison to mortgage debt, which is 76.9 percent of total debt outstanding, two experts in the field, Leighton Ilunlcy and Jonathan Glowacki, wonder If student loan debt could become the next subprime crisis and cause turmoil in the market. Both gentlemen work for Milliman, one of the world's largest providers of actuarial and related products and services. They recently pubUshed their thoughts on this topic.

Hunley and Glowacki looked at the historical delinquency trends between both mortgage debt and student loan debt to see if they could provide an indication of whether student loan debt has the potential to be the next subprime crisis. The delinquency rate for seriously delinquent student loans (defined as the balance of loans 90 days or more delinquent divided by the total balance of outstanding loans), according to Hunley and Glowacki, has been steadily climbing from about 6 percent in 2003 to more than nine percent in 2011.

A prolonged increasing trend in serious delinquencies, diey found, is likely not sustainable for any type of credit risk, and die trend will eventually have to correct. The correction might be through write-offs on principal balances or might come from better underwriting from issuers of student loans. Indeed, in recent financial quarters, the percent of student loans seriously delinquent has decreased to less than 9 percent.

"What we have learned from the mortgage crisis is thai you really need to have a good sense of who you are lending money to," says Hunley. "What is their credit history? What is their income potential? - and other attributes. And at a more macro level, what is the current economic environment like? That's what we mean by better underwriting. We want to truly understand who is receiving this money and how can they repay this money in the future."

Hunley wants "smarter" underwriters and "smarter" loan consumers. Borrowers, he says, should be better educated. He would like to see schools offer more personal finance classes, maybe even malting them a requirement for those studentü who will have a high debt load when they leave school.

"Coming out of undergrad, I didn't have a good sense for how much it was going to cost me at the end of the day when I was finished with college. I got the paperwork filled out, signed away, and I was in college and happy to be there. I didn't really give much consideration to what my debt might be when I was done with my schooling," says Hunley.

In today's job market, where prospects for finding reasonable employment might seem dismal, some graduates are opting to further their education. Such decisions, aldiough well tliought out, create even more student loan debt.

Hunley has a few suggestions on how underwriters can deal with this. Underwriters, he says, should take the student's situation into consideration when determining the terms of a student loan. For example, he envisions a system in which students pay debt back in proportion to their income level once they graduate, whedier with a bachelor's or a master's degree. …

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