Sunday, March 11, 2012

Wouldn't You Expect Student Loans To Be Less Delinquent Than Other Types Of Credit?

I thought the whole idea of student loans for college is that the investment in a college degree would lead to dramatically improved job prospects. I guess not.
Students may be struggling with debt more than we knew, according to a team of five researchers at the Federal Reserve Bank of New York. They explain that borrowers were late on $85 billion in student loans in the third quarter of 2011, which at face value is about 10 percent of the $870 billion in total outstanding student debt. While that rate is more or less in line with other forms of consumer debt like credit cards and mortgages, it is also “understated,” the team says, because not all student loans can be delinquent.
The article goes on to talk about hidden ways student loans can be delinquent, but the part that jumped out at me was that the student loans had the same characteristics as other credit. That doesn't make any sense to me. Credit cards used to buy furniture and big screen TVs don't lead to better job offers.

Ahhh. I see. It's related to the folks who take out the loans, but don't finish college.
In the study of Texas A&M borrowers, student Grade Point Average (GPA) had the strongest association to default of any success variable. The default rate of borrowers with a GPA of 2.0 or less is nearly 18%, but for borrowers with a GPA of 2.5 or more the default rate is <2%, and for borrowers with a GPA above 3.0, default is <1% (Steiner and Teszler 2003).
So if I was a lender other than the government, I would predicate student loans on good grades. In fact, if it was my bank's money, I would insist on seeing on year's grades before I gave out loans. You'd have to pay your own way for a year and prove you could make the cut before you could start digging a financial hole for yourself.

Of course then it wouldn't be a right any more and we'd get lots and lots of this:


Kelly the little black dog said...

I'm trying to remember, but I think loans when we were in school were very different. You could defer payments until you graduate if you were in good standing. They made allowances if you were unemployed and the interest rate was about half the rate in the article. They also capped the amount at something like 20K for an undergraduate degree.

I'm stunned at the amount of debit kids are racking up now. Amounts that could buy you a nice house.

Unknown said...

I actually thought that student loans are really a good help but it seems like it turned out to be a bad option to use. The rising number of defaulted student loans really affect the credibility of the loan itself.