From tomorrow’s paper:
The hunger for yield is driving investors to snap up securities backed by student loans, even as borrowers are falling behind on their payments at a faster clip.
Sadly, I cannot figure out who these investors are. I don’t understand how we can publish a story on this and not discuss who is buying this. If investors want yield but are also aware of this, what is encouraging them to take these risks? Are these pension funds? State municipal pools? Insurance companies? Who? And of course they couldn’t be investing in these with an understanding that should the loans go bad they’d ever get a handout, you know, to stem the systemic risk that such losses would present. And are these being purchased with leverage? How much?
Here is something that should not be surprising:
Private lenders such as SLM, known as Sallie Mae, make loans that aren’t backed by the federal government. They lend based in part on borrowers’ credit history, and have tightened their lending standards since the financial crisis. By contrast, the federal government, which makes more than 90% of student loans, doesn’t check credit records for most student loans.
Or try this on:
People under 30 are struggling the most. The delinquency rate jumped to 35% last quarter from 26% in 2008, according to the Fed report.
Ethan Sjolander, 26, graduated in 2007 from Houghton College in Houghton, N.Y., with a degree in business administration and about $24,000 in student loans. Mr. Sjolander said he never missed a student-loan payment, but racked up about $11,000 in other debt in part by paying for food, car repairs and gasoline with his credit card.
Mr. Sjolander, who now works as an administrative assistant, says his debts have forced him to delay plans to buy a nicer car, and put off going back to school for another degree.
There’s too much packed into that last paragraph to comment in such a short post. Indeed, college has been oversold.
I don’t see the problem with the last paragraph, to be honest. He may have 24k in debt, but clearly 11k of that has nothing to do with college. He chose to borrow to pay for living expenses, which is probably the number 1 reason why people take on too much debt. But that is due to two reasons: easy to get government loans which require no justification for taking on, and pathetically stupid kids (and parents). Both these problems are quite independent of “college”, or whether college remains a worthwhile investment. Of course, any good investment can be made bad, if financed improperly.
That being said, the fact that he can’t buy a new car isn’t exactly evidence of some greater burden placed on him. We don’t know whether the actual education received is/will be worth while, since we don’t know how much he is earning compared to what he would have been earning without that degree.
I would certainly agree that SOME sorts of college degrees and types have been oversold. After all, the majority of delinquencies on student loans are not from the 4-year colleges, but the 2-year colleges and trade schools. Furthermore, there are many different types of “colleges” and many different types of degrees one can get. Some have become too “attractive” to get due to easy lending and due to government-sector demand for such degrees; I’m talking about things like education, social work etc, which probably attract a good 50-60% of female college students. But of course comparing the “worth” of investing in an education degree, vs. an engineering degree, isn’t straightforward.
There are lots of contributing factors and problems, but sometimes we libertarians/right take it a bit too far when we accuse “college” of being at fault. Becker and Posner have a couple of good thoughts on this issue on their blog.
“He may have 24k in debt, but clearly 11k of that has nothing to do with college. He chose to borrow to pay for living expenses, which is probably the number 1 reason why people take on too much debt.”
Actually, what the article didn’t make clear was that I racked up that debt to pay for living expenses because I did not want to default on my student loans, which were $300 a month upon graduation, and I was making $10 an hour because I was working a job that didn’t require my degree.
The article also didn’t make clear that the “another degree” I wanted to get was in a completely different field that I wished I had entered first… but I was pushed into going straight to college after high school because “that was how to get ahead in life”. I would have been better served by getting into the work world first and figuring out my interests before dropping huge money on a degree I ended up not liking.
But I’ve been luckier than many of my peers – I finally got a good job I liked, and at 30, my college loans are now paid off and my credit card debt is a small fraction of what it once was.
There is a hunger for yield, to pay the bills.
Every month the Fed buys $85 billion or so of 10-year Treasurys and junk loans from banks to stimulate a narrow segment of the economy in the hope that bulldozer operators, plumbers, and carpenters will find work and push the stubborn unemployment index, a lagging indicator, down. In effect, our dollar is not a gold dollar, but rather a labor dollar. How stupid is that?
In exchange, we get a mountain range of future inflation to repudiate debt, and in the meantime rob savers, including me and my mother-in-law of tens of thousands of income. They should be rioting in Florida.
Instead, financial advisors (brokers, and insurance and mutual fund salespersons) are pushing people into higher yield, which means more principal and credit risk. The smart money is in cash, waiting for everybody to run for the door.
This is a dismal picture, the reverse of a situation where interest rates decline because the dollar is sound.
It is the picture of the debtor as king, and the producer as the serf.
I just caught the part about postponing plans for getting another degree. That is mind blowing.