Can student loans grow endlessly in USA? - Latest News About Finance Trade and Real Estate USA Pittsburgh PA

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Sunday, May 19, 2019

Can student loans grow endlessly in USA?

The title tells us "student loans owned and securitized outstanding". This is the amount of total outstanding student loans in the United States.
From the beginning of 2008 until now the total amount of student loans has increased from 481 billion USD to 1,521 billion in early 2018, a multiplication by 3,16.

This is much higher than the rise in consumer credit for US households, which over the same period only multiplied by 1.62 (from 2,275 to 4,274 billion dollars).

The debt to pay for education is not really an immediate consumer loan but a future investment loan since educated households and students constitute human capital.

This is where questions arise. The 44 million borrowers are US borrowing students and ex-students in debt; they follow a logic of personal investment, hoping that the skills acquired during expensive studies allow them to repay their loans.

On the paper the model holds. The average amount of debt is in the order of USD 35,000 per borrower (student and former student). Median wages for hired youth are in the range of USD 50,000, with a high degree of dispersion.

The default rate for student loans is significant (11.3%). However, today, the dynamics of the job market are impressive in the United States; the salaries of young graduates are rising sharply. All in all a reassuring average image: the average student can repay his average loan in a few years.

Structural fragility

It is different if we look in detail and in the longer term. 60% of student loans are for "graduate" studies, ie at Master's level: Master of Law, MBA, Master of Sciences and these studies are well valued and lead to well paid jobs. Students can logically borrow more for expensive studies.

The average amount of debt to finance an MBA is 42,000 USD. It is very bearable with a salary of 60 to 70 000 USD. The average debt for Master of Law studies is 142,000 USD. This is often bought by law firms. Here the model turns out well.

The model is more fragile at the level of 60% of student loans that concern undergraduate university studies; which corresponds to the License level. The unemployment rate of undergraduate graduates is in the order of 17% after their studies. The explanation comes from the mediocrity of some private university colleges that engage students in expensive, low-quality or low-quality studies in areas that are not much in demand or misleading.

Departments of human sciences, various social studies, "Peace and love studies", attract unselected students worn by a certain time and who find themselves without a merchant job at the exit. This type of study and students explain the default rate of student loans.

Student loan inflation allows the system not to regulate itself; it favors the development of the higher education system which takes the form of a forward flight financed on credit.

A first consequence of this mess is to generate individual failures.

Three key questions

 At the collective level, the following questions arise:

A turnaround can lead to an increase in the default rate of accumulated loans. There is an amount at risk of 150 to 200 billion dollars. The story repeats itself. Certainly the parties involved are not the same. There is the question of the efficiency of the university system and the soundness of its development model. Of course we would not dare to mention the quality of training and diplomas at Harvard or MIT. On the other hand one must be doubtful about the last 100 or 200 Universities deprived of a system of higher education which counts 500 or 600 Universities.

The rise in interest rates is an exogenous shock to the solvency of US student loans. Is this exogenous shock strong and threatening? Not at first because with intelligence and pragmatism the system of student loans uses a safety net granted by a state institution, the SLMA. It also manages the credit risk by adding very comfortable margins. Today these loans are nicely profitable. Judging by the rates of loans guaranteed by the SLMA (body still says "Sallie Mae"). These range from 5.7% to 11.9% for fixed rate loans and from 5.7% to 12.9% for variable rate indexed loans. Obviously the lowest risk loans are cheaper.

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