Archive for the ‘Student loans’ Category

While writing an article about college savings plans, the sheer number of plans in the marketplace struck me as slightly absurd — more than 100. Some states have multiple plans and there appears no sign that this trend will stop anytime, just as tuition and student loan debt continues to rise rapidly.

Check out these statistics:

  • Student debt load averages $26,600: The average graduate left college in 2011 — the most recent year for which figures are available — with $26,600 in debt, a 5 percent increase from 2010, according to The Project on Student Debt at the Institute for College Access and Success.
  • Underemployment rate for grads is 18.3 percent: The unemployment rate for recent college graduates averages 8.8 percent, according to the federal Labor Department, via CNN. Including those who are employed part time but who would rather work full time and those who have quit looking for a job, and the underemployment rate is 18.3 percent. More than half of these recent grads are working in jobs that don’t require a college degree.
  • College tuition and fees rose 5.2 percent per year over the inflation rate: During the decade between 2002-03 and 2012-13, college tuition and fees rose by 5.2 percent over and above the official inflation rate, with room and board increasing at a 2.6 percent rate.
  • The average balance of a college savings account s $17,174: While this balance is up 12 percent from 2011, it could be due as much to an increase in stock market values as an increase in savings. The College Savings Plans Network also reported that the number of 529 plans rose 4 percent to 11.1 million with total assets standing at $190.7 billion.

When you consider all these numbers together, the picture it paints is bubble-like and unsustainable. The pace of tuition, room and board increases is finally slowing somewhat after years of hyper-growth; unfortunately, the slowing pace is still way too high for the means of the average family that has hopes of sending their children to college.

And while college savings rates are increasing, they are woefully inadequate to pay for the rising cost of college. In addition, for middle class families, the burden of saving for college is likely distracting them from saving for retirement and is in many cases burdening them with loans, because many parents are forced to take out parent loans because their children can’t qualify for enough aid.

Moody’s Investor’s Service warned in January that the business models of most colleges are on a path to unsustainability as more parents and students are forced to choose a college purely based on cost. Americans have borrowed more than $1 trillion to fund college educations and spend more than $400 million per year.

As college debt loads rise, there is more doubt that a college education is worth the cost. I hate to see that because I value the liberal arts education that I received nearly 30 years ago and invested more to gain an accounting certificate four years ago.

My oldest son graduated Phi Beta Kappa from Vassar College in 2012 and is preparing to go the University of London for a MS degree in the Fall. Despite generous scholarships, he still has a debt load that I find somewhat worrisome.

What’s the answer to all this? Here’s some food for thought:

  • Colleges need to tame their mania for building, rising administrative salaries and the arms race to attract the most highly qualified students and think about what programs and services that they can deliver at a reasonable cost will result in the greatest return on investment for the average student and the community they serve.
  • Parents and students need to take a hard look at the types of schools that will best serve their  needs, not the school with the best name or reputation. Because even a degree from a top school may not come with a commensurate job that can pay off tens of thousands if not hundreds of thousands of dollars in debt.
  • Loan rates need to be cut drastically – Elizabeth Warrens’ bill to cut student loan rates to the rate that banks get from the Federal Reserve is a great start. Otherwise we’ll end up bailing out banks and the government when the student loan bubble bursts, which could also leave a generation of students unable to move forward in their lives as they are tied to huge debt loads that they have no realistic prospect of paying off or discharging.

As college becomes less and less affordable, private student loan companies are originating more loans, then securitizing those loans to yield-hungry investors, the Wall Street Journal reports. Sallie Mae, which is the largest U.S. student loan lender, sold more than $1 billion in securities backed by private student loans last week and demand outstripped supply for the highest yielding securities by 15 to 1.

The story goes on to report that Second Market Holdings today rolled out a trading platform so that lenders can issue these securities directly to investors.

What’s driving increased borrower interest is that student loan securities carry higher yields than many other types of fixed income securities. In an interest rate environment where the Federal Reserve is committed to keeping rates low through next year, investors are reaching for yield in different sectors, student loans being the latest.

The caveat is because of fairly high unemployment and underemployment among young people, these securities carry a fair amount of risk. Some of these borrowers are finding it increasingly difficult to stay current on their student loans. In fact, the story reports that 31 percent of borrowers are at least 90 days late as of Dec. 31, 2012; those rates include Federal student loans, which are securitized, and private loans. Sallie Mae says that only 4.6 percent of loans in repayment are more than 90 days past due as of Dec. 31, 2012, down from 4.9 percent in the fourth quarter of 2011.

Here are the take-aways I see:

  1. If you’re an investor looking for yield, don’t put too much of your bond allocation into higher-yield, riskier securities such as private student loans. Diversify your bond portfolio with either individual securities or mutual funds that have differing maturities and credit quality.
  2. The securitization market for riskier assets is alive and well. Just how accurately these securities are being rated and what their actual underlying risk profile will prove to be over time isn’t something we can know right now, but it bears watching. We learned all too well in the last financial crisis what  a bad marriage loose credit rating standards and securitization run-amok is. Fortunately, the securitization market for student loans is much, much smaller than that of mortgages. Still, the market bears watching for signs of a bubble and other problems that could potentially destabilize the financial markets and financial institutions.