Lots of Debt, No Degree
Dr. David Mielke, Retired Dean, College of Business at Eastern Michigan University
There have been a number of news stories in the past week about the amount of student debt. This is a topic we have covered in the past, but it is one of ongoing importance. The government took over the student loan market about a year ago. As a result, the federal government made 93% of student loans for college last year. President Obama made easy-to-get loans part of his re-election platform, calling higher education “an economic imperative in the 21st century.” The six year graduation rate for full-time students is 45.2% for low income students and even lower for part-time students. That means that over 50% of the low income students – those who are the most dependent on student loans – never get a degree, but leave with debt averaging over $25,000 per student. Should we be encouraging all students to pursue a degree and to incur huge debt, when we know less than half of the students will graduate? Is this the “Right Thing to do?” Here are some issues to consider”
1. U.S. student loan debt increased by $42 billion, or 4.6% to $956 billion in the third quarter this year. Overall, household debt declined during that period. Since the end of 2007, just before the financial crisis hit, total student loan debt has grown by more than 56% adjusted for inflation.
2. Payments on 11% of student loan balances were 90 days behind at the end of September, up from 8.9% at the end of June. Delinquencies for other consumer debt categories were flat of declined. Experts state that the delinquency rate is understated since many students have not been required to make repayments yet. Student loan debt cannot be eliminated through personal bankruptcy. There has already been talk of changing that provision of student loan agreements to allow bankruptcy to eliminate the debt.
3. The government demands no collateral, has no underwriting requirements and no minimum credit scores to get the loans. In fact, Education Secretary Arne Duncan says the goal of the student loan program is “to make student loans available to as many people as possible.”
4. Government Stafford loans are capped at $57,500 and can be used for tuition as well as living expenses. Loans for graduate students have no upper limit.
5. Default rates are worse for students who have attended for-profit colleges. They represent 12% of total undergraduate loans, but 22% of the Stafford loan defaults. Among the federal loans that became due on September 30, 2009, 23% defaulted at these institutions while the overall rate for all institutions was 13%. 58% of the 1.8 million borrowers whose student loans became due in 2005 haven’t received a degree and 59% of them are delinquent or have defaulted on their loans. Even 38% of college graduates are delinquent or have defaulted.
6. 34 million Americans over 25 years old have some college credits, but haven’t received a diploma. The number grew by 700,000 over the past 3 years.
7. There were 1.9 million unemployed college graduates in October. One estimate has half of young graduates unemployed or working in jobs that do not require a college degree. Only 25% of college students are traditional full-time students, the rest are part-time. Part-time students have a lower graduation rate.
Should all students be encouraged to attend college and be eligible for loans? Is this the “Right Thing to do?” I do think students who meet admissions requirements, should be encouraged to further their education. College graduates earn 37% more than drop-outs and have a lower unemployment rate, but there should be some basic requirements to qualify for loans, such as how much debt they currently have, their academic history, expected income upon graduation, and given major. There should also be serious consideration whether or not loans can be used for living expenses. There should be annual performance reviews—even better semester by semester to assure loans are continued only if academic progress is being made. It is an economic imperative to have more college graduates, but not at the cost of 50% of those admitted never graduating and having a millstone of debt for the rest of their lives.