Why Student Loan Delinquency Is Up
Americans with student debt have gotten slightly better at making regular loan payments in recent months, but the number of borrowers who have fallen behind is still extraordinarily high. According to the New York Fed's latest Report on Household Debt and Credit, 10.9 percent of student-loan balances were 90 days or more delinquent last quarter. That's a small improvement from 11.2 percent in the previous quarter, but still nearly twice the delinquency rate during the early 2000s.
It's tempting to blame rising student-loan delinquency and defaults on weak job growth -- and indeed, high unemployment is a leading indicator for these problems. But the number of students struggling to repay their loans was increasing long before the Great Recession. Default and delinquency rates began rising in the early-to-mid-2000s, when the unemployment rate for recent graduates was actually falling. Interest rates, another factor impacting students' ability to repay their loans, fell to record lows between 2001 and 2005, before rising to a fixed rate of 6.8 percent in 2006. So even if higher unemployment and interest rates explain many of the delinquencies we've seen in the last few years, they're hardly the whole story.
In fact, the primary factor driving more and more students to fall behind on their loans is both more mundane and harder to fix: the rising cost of college itself. Last year, three out of four undergraduates attended a state-funded, public four-year college at an average cost of $8,655 per year -- 66 percent higher than the $5,213 they would have paid ten years ago. That's a difference of $13,768 over four years for the average undergraduate ($20,652 for those who take six years to complete their degree). It's why the average student loan borrower now leaves school with over $26,000 in debt -- a significant increase from the average $23,300 in 2000, or $15,700 in 1993 -- substantially increasing the likelihood of delinquency.
Another part of the problem is the popularity of for-profit schools, many of which offer a noxious combination of high price tags and high default rates. Enrollment at for-profits has grown dramatically over the past decade, from just over 670,000 in 1999 to nearly 1.8 million in 2008. The number of for-profit institutions nearly doubled over the same period.
The Obama administration is hoping to fix both problems with a new plan, outlined late last week in a speech at the University of Buffalo, that would create a ratings system for colleges based on specific factors, like tuition, graduation rates, and the debt levels and earnings of graduates. With congressional approval, the new "College Scorecard" ratings would later become the basis for federal financial aid, incentivizing for-profits and other schools reliant on government dollars to improve their standards.
Although bipartisanship is unlikely in today's political climate, there is real precedent for something like this to work. When Congress amended the Higher Education Act in 1992 to create stricter criteria for receiving federal funding, the student-loan default rate dropped more than 50 percent. Some of that drop was spurious, the result of colleges' moving students between programs to get their average default rates below the new threshold. But much of the improvement was real. President Obama believes he can replicate that success with an even more comprehensive set of guidelines, as well as greater transparency to enable students and their families to make informed decisions.
Unfortunately, the president's plan stops short of addressing the real reason tuition has increased so dramatically at public colleges and universities: state budget cuts. According to the Center on Budget and Policy Priorities, these schools' per-student annual revenue from state and local governments declined $2,600 between 1987 and 2012 after adjusting for inflation. Not coincidentally, per-student tuition increased by the same amount over the same period. As public funding for higher education has decreased, students have paid dearly to make up the difference.
Tightening eligibility for federal financial aid is a good first step toward pressuring schools to improve student outcomes. But it needs to be paired with increased funding and stronger state support for those public institutions that have been unfairly tasked with educating more students with less money. Until then, low- and middle-income families will continue to take out ever-larger loans, increasing their risk of delinquency or default. Right now, it's the only option they have.
Benjamin Landy is a policy associate at The Century Foundation.