A recent New York Federal Reserve study has found that 11.2 percent of 39 million borrowers with student loans are 90 days-plus delinquent on making payments on the nation’s $986 billion of student loan debt.
A pretty depressing statistic. That’s more than 4.4 million Americans joining a lost generation of opportunity — and counting.
But the truth may even be worse than that, according to an ominous footnote from the New York Fed study: “delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in grace periods, in deferment, or in forebearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”
Meaning, once everyone else enters the repayment cycle, the lost generation’s ranks may swell to about 8.7 million.
Too Little Hiring
Yet according to government statistics, only 4.3 million Americans with some college or college degrees are unemployed. On the surface, it is hard to reconcile these two statistics.
But a little digging of Bureau of Labor Statistics data reveals the problem. As of May, the population of those with some college or a college degree 25 years old and older has increased by nearly 11 million since 2009, but only 5.2 million entered the labor force. As such, the participation rate declined from 75.7 percent to 72.6 percent.
If the participation rate had just held steady, there would be an additional 3.6 million people in the labor force, resulting in an 8.7 percent unemployment rate — some 7.9 million people — instead of the 4.9 percent reported rate for those with some level of college education.
The trap many borrowers find themselves in is they cannot afford to take an entry-level position to obtain the skills necessary to get the position that would ultimately enable full repayment.
Yet, this sorry record of finding jobs for college-educated individuals has had no effect on the federal government’s student loan program.
According to a May 2013 estimate by the Congressional Budget Office, the federal government will give $105 billion in new student loans to about 12 million student borrowers this year alone. Assuming it takes five years to complete the coursework on average, that’s about $44,000 of total debt per student. Unlike other debts, student loan debt cannot be defaulted on. It will follow these borrowers around for 25 years.
Another $1.266 trillion of loans will be given through 2023 to about 26 million more Americans. Should the delinquency rate hold, another 5.8 million could be unable to find work upon completing college, adding to the population of the highly educated underemployed.
So, if nothing changes, the lost generation could total 14.5 million by 2023.
The real lesson here is that financial incentives work. When government throws unlimited money, whether it be at education or mortgage finance — a tremendous misallocation of resources via a central vehicle — nobody should be surprised when outcomes are distorted and real lives are turned upside down.
There are no easy answers, but the outcome was probably predictable once Congress moved the federal student loan program beyond engineering, science and education degrees in the Higher Education Act of 1965.
Adding to the folly, for decades society has pushed the idea that a college degree was some sort of guarantee of employment, and an entitlement to boot. So, a high percent of Americans have now obtained college degrees, financed by mountains of student loan debt.
But it was a scam. The loans were given regardless of a student’s chosen major, regardless of any risk, fueled by unlimited government financing. In turn, over-enrollment forced massive expansions on institutions, driving the costs of tuition to the moon. In the race for “affordable” education, through limitless financing, the cost of education has been driven to the moon.
Both major political parties have funded big education every year through this financing scheme without a second thought. The money comes directly from U.S. Treasury borrowings, and right now neither party has any proposal to curtail the lending.
Need for Risk Assessment
Short of pulling the plug on the financing and forcing institutions to compete on value, the least that could be done is to introduce risk assessment into the student loan program.
Right now, nothing is changing, leaving the American people with the options of saving for their children’s educations, teaching personal responsibility, and in the meantime, watching aghast as the incentivized lending and borrowing continue unabated anyway.
After all, not everyone can afford to save, and as bad as the job prospects for the college educated are, the prospects for those without any college education are even worse. This incentivizes students, even today, to excessively borrow for school in the hopes they will be the lucky ones to find a job, even as the risks of not finding one rise.
Robert Romano ([email protected]) is the senior editor of Americans for Limited Government. Reprinted with permission of NetRightDaily.com.