Student Default Rates Jumping

Some not so surprising news in an era of a poor economy, dearth of jobs, and stratospheric college costs.  Recent students are showing an increasing propensity to default.  The figures here are deceiving as these are the default rates WITHIN 2 years of when the loan should be paid back.  According to hedge hogger Jim Chanos the default rate at ‘some point’ of the life of the payback is over 40% – that’s astounding.  Essentially he indicated (on CNBC this morning) 1 in 2 Americans defaults on a student loan at some point.  And of course much of this is federally backed student loans – especially in the for profit colleges, so the tax payer loses.

On the positive side?  Just like strategic defaults, this is good for the economy!  Why?  When you don’t have to pay your debt, you can use that cash flow to consume in the here and now.  Sure the tax payer loses but at this point just put in on the bill under ‘Ponzi’. Irony.  (that said the rules about paying back student loan debt are supposed to be far less forgiving than not paying back a mortgage)

Via AP:

  • The number of borrowers defaulting on federal student loans has jumped sharply, the latest indication that rising college tuition costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt.
  • The national two-year cohort default rate rose to 8.8 percent last year, from 7 percent in fiscal 2008, according to figures released Monday by the Department of Education.  (again this is within the first 2 years of when they should be paying back the loan)
  • Driving the overall increase was an especially sharp increase among students who borrow from the government to attend for-profit colleges.
  • Of the approximately 1 million student borrowers at for-profit schools whose first payments came due in the year starting Oct. 1, 2008 — at the peak of the financial crisis — 15 percent were already at least 270 days behind in their payments two years later. (if you are 270 days behind, 2 years later that means you already started to default at just over a year into the payback period) That was an increase from 11.6 percent among those whose first payments came due the previous year.
  • At public institutions, the default rate increased from 6 percent to 7.2 percent and from 4 percent to 4.6 percent among students at private not-for-profit colleges.
  • “I think the jump over the last year has been pretty astonishing,” said Debbi Cochrane, program director for the California-based Institute for College Access & Success.
  • Overall, 3.6 million borrowers entered repayment in fiscal 2009; more than 320,000 had already defaulted last fall, an increase of 80,000 over the previous year.
  • Troubling as the new figures are, they understate how many students will eventually default. Last year’s two-year default rate increased to more than 12 percent when the government made preliminary calculations of how many defaulted within three years.
  • Among some of the largest and better-known operators, the default rate at the University of Phoenix chain rose from 12.8 to 18.8 percent and at ITT Technical Institute it jumped from 10.9 percent to 22.6 percent.

Key difference from mortgages —-

  • The department emphasized that it eventually manages to collect most of the money it’s owed, even from defaulters. But that’s part of the reason federal student loan defaults are so hard on borrowers — they can’t be discharged in bankruptcy. Defaulting can also wreck students’ credit and keep them from being able to return to school later with federal aid.
  • “There are very few avenues for escaping that,” Cochrane said. Also, “many employers these days are starting to check credit so it can hurt your job prospects.
  • According to calculations by TICAS and using the latest available figures, in 2008 average debt for graduating seniors with student loans was $20,200 at public universities, $27,650 at private non-profits and $33,050 at private for-profits.
About Mark Hanna 543 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

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