Student loans: debt, defaults and delinquents | FT Alphaville

Student loans: debt, defaults and delinquents

The Everest for-profit education network says of a decision to attend one of its colleges: “It’s a decision that deserves respect.

Perhaps — but it’s definitely risky.

According to new provisional data from the US Department of Education assembled by the Chronicle of Higher Education, 39 colleges, mostly “proprietary”, have average loan default rates of above 40 per cent within three years of repayment. Around one third-of these are in the Everest network, though coding issues make it difficult to work out the spread across different campuses.

The Chronicle of Higher Education used trial (i.e. unaudited) data released by the Department of Education in February to track borrowers that began repaying student loans between October 2007 and September 2008. It calculated the percentage of these borrowers that had defaulted on their loans after two and three years.

These default rates are important because for-profit colleges are locked out of federal-aid programmes if, inter alia, their two-year default rate is at or above 25 per cent over three successive years. This disqualification criterion will change in September 2014 to a three-year rate of 30 per cent or higher for three successive years (see graphic below).

The CHE has a full table of results (subscription only), but here are its average default rates by sector:

For the public institutions analyzed, the two-year rate was 6 percent and the three-year rate was 10.8 percent; for private institutions, the two-year rate was 3.7 percent and the three-year rate was 7.1 percent; and for the for-profit colleges, the two-year rate was 11.3 percent and the three-year rate was 24 percent.

Why the big jump in default rates between two year and three years after graduation? The CHE suggests that it is because for-profit colleges, keen not to lose their access to federal aid, actively monitor their graduates and encourage them to make their payments those first two years — CHE refers to it as “demand management”.

But because the Department of Education stopped checking after two years, for-profits slackened their viligilence over grads once that mark has been passed — and the true poverty of the students’ credit profiles then becomes clear. Or so CHE suspects.

There are some colleges where the difference is large — and in a previous article, the CHE tells several anecdotes of dodgy demand management to the benefit of the college rather than the borrower. There have been separate reports of aggressive recruitment practices and we’ve already noted the small but growing area of financing direct from colleges.

It could well be a big problem, but there’s no suggestion of any laws being broken and, for the most part, it could simply represent businesses making the best of the regulations they face.

It’s also unclear from the numbers alone that these are widespread shenanigans: using a 15 per cent difference (see chart above) biases the sample towards those institutions that have high absolute numbers of defaults when the point is about relative differences between two and three year rates.

High default rates in for-profit colleges should be well known by now. We worry about them. So does Steve Eisman. There is a ferocious battle (and ferocious lobbying) in Congress over whether regulation should be stepped up and federal aid should be more contingent on the future success and solvency of students. The finer details should be up for debate, but not the principle: public subsidies for private policy providers should be as outcome-focused as possible.

However, while verging on the tendentious at times, CHE does remind us that the credit outlook for student loan holders should be a concern, more broadly. Not only in for-profit colleges.

An Institute for Higher Education Policy report last week added an extra layer to our understanding by identifying the extent of delinquencies (non-payment after 60 days) amongst borrows, in addition to defaults. The table below shows the payment profile for 1.8 m student loan borrowers who entered repayment in 2005.

Now, the years 2005-9 were unusual for many reasons, and of course there are perfectly healthy reasons (continuing study for example) for postponing repayments. But having only one-third of student borrowers follow the “normal” path of repayment still seems a bit low.

Here is the profile broken down by institution type:

Unsurprisingly, the figures look worst for for-profit colleges. They would point out that this reflects the demographics and graduation rates of their students. We haven’t read all the arguments here, but this doesn’t seem to be the whole story.

So for-profit colleges are important, especially because they educate many students failed by poor elementary and high schools. But while they’ve grown rapidly in recent decades to enroll around 10 per cent of students, they’re part of a bigger picture.

The WSJ reported way back in August that the aggregate amount of US student loan debt had surpassed the amount of credit card debt. This coincides with a long-running above-inflation rise in college fees. While develeraging continues in most areas, as these charts from the New York Fed’s November consumer credit show, student loans remain an exception worth keeping an eye out for:

An op-ed in Sunday’s Boston Globe underplayed the for-profit problems but got its main point spot on:

With all of the energy expended taking sides — for or against regulations, short sellers, private equity, and Goldman Sachs — lost in the discussion is the precarious state of America’s education debt. Since 2003, the total debt burden from education loans to private and public institutions has grown 18 percent per year and now stands at over $500 billion. By contrast, mortgage and credit card debt has fallen over the past three years.

At the housing bubble peak, the mantra was “homeownership at any cost.’’ Here, it seems to be “higher education at any cost.’’

“Any cost” keeps getting higher.

Related links:
The biggish short — subprime student loans – FT Alphaville
For-Profit Schools – Pro-Pubica
Greenberg: Spotlight Returns to For-Profit Schools – CNBC