On January 11th, the Brookings Institution issued a report finding that the default rate for undergraduate, federal student loan borrowers nationwide will be about 38% by 2023, indicating a true, lifetime default rate of about 40% This is far, far higher than any lifetime default rate publicly acknowledged for federal student loan borrowers previously. Many are quick to blame this astonishing default rate on the for-profit colleges, but it turns out that subtracting them out of the analysis entirely still leaves a default rate of 33.4% for the “good” schools. Clearly, the non-profit colleges can no longer “scapegoat” the for-profit sector, and blame them for the default crisis this nation now faces. It is time for the non-profit colleges to own up to the fact that their students are defaulting at a rate never before seen for any lending instrument in this nation’s history.
What is more disturbing: In the 2003-2004 school year, the average undergraduate borrower left school with about $13,000 in federal student loans (2). Today, that has increased to about $39,000- greatly outpacing inflation (3). During the same time period, earnings have flat-lined.
It is, therefore, not a stretch to say that the overall default rate today is far higher than the 40% found by this study. Recent WSJ reports show that 400,000 defaults were added to the roles in 2015, and that this increased to 1.1 million defaults added in 2016. This acceleration of defaults, combined with the borrowing and earnings trends since 2003 would indicate that the lifetime default rate for more recent students is surely greater than 50%. Probably far greater.
What is most disturbing: Years of White House Budget data confirms that the Department of Education has been making a profit, not a loss, on defaulted federal student loans. Figure 1 (below) shows the recovery rate for federal student loans vs. all other government made or insured loans for 2010- the median year between 2004 and today. Student loans are returning more to the government than it pays out on default claims, and even allowing for generous collection costs, this still remains true.
Evidently, the government has figured out a way to get blood from a stone. This has been enabled by the unprecedented, and unwarranted removal of bedrock consumer protections including bankruptcy rights, statutes of limitations, and others. The ability to pursue a borrower for their entire life, combined with a draconian collection regime surrounding these loans.
Bankruptcy rights are called for in the Constitution ahead of the power to declare war and raise an army (4). The removal of these from student loans- and the consequences that we now are witnessing- clearly demonstrate the wisdom of the Founders (who themselves were subject to abuse at the hands of British Banks and merchants).
This problem could have been avoided entirely by returning bankruptcy
protections years ago. This would have compelled the government to oversee the lending system more judiciously, and to crack the whip on the schools to keep their prices down, their quality up, and the time to graduate (currently 6.2 years for a bachelor’s
As we speak, there is a bipartisan bill in the House of Representatives, HR. 2366, that will achieve this. But the bill faces serious headwinds from the Swamp — the unelected bureaucrats, lobbyists, and investors who have been profiting enormously off the backs of the students under the weight of this predatory lending system,
and who have perpetuated it far beyond what even they (I suspect) had thought possible.
Now, we are now seeing calls for full-on loan cancellation. In early February, the Levy and Sanders Institutes released a joint study that estimated an annual $86 billion stimulus would be produced by canceling all student loans. Interestingly it turns out that this estimate is far too low. The study completely ignores the increased borrowing capacity that erasing $1.6 Trillion would cause.
It is probably reasonable to assume that this would add about a third of that total- $500 Billion- in borrowing capacity and that most of this would be used over 4-5 years. This increases the stimulus from $86 billion to about $200 billion annually.
The citizens have been extraordinarily tolerant of this intolerable lending system, probably to a fault. But this tolerance is vanishing under our feet. If bankruptcy rights are not restored to this debt at a minimum, it is obvious that a de facto Jubilee will certainly occur, whether approved by Congress or not. This will certainly happen during the current presidential term, and could happen this congressional session.
Congress had better hop to it if they wish to avoid seeing this lending system vanish into a mist of illegitimacy.
Update: Demonstrations are planned for April 16 & 17. Watch our new video!
Photo credit: Student Loan Justice