Student Debt a Harsh Math Lesson for U.S. Graduates as Wages Lag

(Bloomberg) -- If scraping up enough beer money was a challenge for America’s college students, new graduates are in for a rude awakening when they realize how much of their paychecks will go toward their school loans.

Since 2003, borrowing for education advanced faster, in percentage terms, than all other types of consumer debt that includes mortgages, auto loans and credit cards, data from the Federal Reserve Bank of New York show. As of the fourth quarter, student loans represented 10.5 percent of a record $13.1 trillion in household debt, up from 3.3 percent at the start of 2003.

The upshot for the economy is that a larger debt burden among younger Americans, many with entry-level wages and salaries, represents a hurdle for large purchases such as those for cars and homes. Fed Chairman Jerome Powell echoed that sentiment in recent testimony before lawmakers on Capitol Hill, saying elevated levels of student debt “absolutely could hold back growth.”

Given the modest wage gains that have persisted during this economic expansion, it may take borrowers many years or decades to pay off educational loans. In the decade through 2017, the value of student loans outstanding soared 153 percent, based on the Fed’s most recent quarterly financial accounts data.

That compares with a 31 percent advance in worker pay, according to the Bureau of Economic Analysis data. During most of the current expansion, businesses have resisted giving out more generous paychecks even as the labor market tightened.

For many recent college graduates, loan payments are their second-largest expense behind rents and mortgage payments. Borrowers who graduated from 2012 to 2017 earn a monthly average after-tax income of $2,655, and about 15 percent of that goes toward student loan payments, according to a survey by LendEDU and lender Laurel Road of 1,000 student loan borrowers who have graduated from a four-year college. LendEDU is a marketplace for student loans and other financial products.

After factoring in rent or mortgage payments, retirement contributions and car loans, these borrowers are left with about $777 to spend each month on food, clothes and other living expenses.

About 11 percent of all student loans were in serious delinquency of at least 90 days or in default as of the fourth quarter, New York Fed data show. While that’s almost three times the share of auto loans in such disrepair, the share of seriously delinquent educational loans is probably two times larger, according to the bank. 

That’s because half of all student loans are currently in deferment, meaning they are temporarily not in the repayment cycle and not considered “delinquent.” Students don’t have to start making payments until they graduate. Yet, these deferred payments are still included in the total balance from which the delinquency rate is derived, lowering the overall delinquency rate.

Those attending for-profit institutions and two-year colleges are likely the culprit behind the surge in delinquency rates. That’s because many of the students either dropped out, failed to land a decent job after college, or were economically disadvantaged from the beginning, according to Brookings Institution research.

Compared to their peers at other colleges, students attending for-profit institutions -- mostly those classified as inclusive, part-time or two-year -- are falling behind in their debt repayments. Twenty-two percent at for-profit schools were behind on their academic loan payments compared with six percent of students at public institutions, according to a survey by the Federal Reserve.

“The for-profits charge higher prices for the same program as the not-for-profits and have much higher default rates,” said Anthony Carnevale, director of Georgetown University’s Center on Education and the Workforce. “On the other hand, there are lots of for-profits in which the awards, whether they’re certificates or degrees, are worth it. The point being, you need a system that disallows programs that aren’t worth it.”

More often than not, education is worth the money, Carnevale said. However, the higher-education system needs to have more transparency when it comes to how college programs translate to job employment, he said.

©2018 Bloomberg L.P.

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