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A new report from Moody's Analytics finds that while improvements in the economy have caused most types of consumer loans to see decreased delinquencies, the performance of student loans has not gotten better – making the outlook for student lending and borrowers worrisome.
The analysis [PDF], reported by Inside Higher Ed and written by Moody's researcher Cristian de Ritis, notes that delinquency and default rates on student loans are likely to rise in coming years because tuition will continue to rise and borrowers' income won't grow enough to service their large loan obligations.
The report points out there also may be a bubble in educational spending. While the country's attention has focused on the real estate market, the growth rate in college tuition has far exceeded real estate appreciation. Tuition and fee costs have doubled since 2000, outpacing the inflation rate for all goods, as well as energy, housing and health care costs, the analysis said.
"Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place," de Ritis writes.
De Ritis could not be reached for an interview yesterday.
In California, students at the University of California will pay more than three times what they paid a decade ago for the upcoming school year due to dramatic increases in tuition and fees and cutbacks in state aid. At California State University, tuition has doubled since 2007.
According to data from the Project on Student Debt, students who graduated from public and private nonprofit four-year universities in California in 2009 had an average of $17,326 in student debt. That data is limited because it doesn't include any for-profit institutions, some nonprofit colleges did not report their student debt data, and the data looks only at graduates – not counting students who take out student loans and never earn a degree.
The Moody's report observes that student lending volume has seen steady growth – unlike other consumer loan segments, such as mortgages, auto loans and credit cards. Part of that is due to an increased demand for education and training, but part of it is because lenders didn't tighten student loan standards the way they did for other loans.
For one, the federal government wanted to make sure students could get loans for education during the recession. And while other kinds of consumer loans depend on the borrower's creditworthiness, student loans are more "speculative," the report says.
"Borrowers and lenders alike hope that the higher income resulting from the human capital investment justifies the cost of the loan," de Ritis wrote.
Another factor driving the increase in student loan volume, according to the Moody's report, is an increase in for-profit institutions. While high-quality proprietary schools can create a "social good" by creating competition for traditional universities, many of them have "abysmal" graduation rates, the report says. That means that students who take out big loans but don't get degrees end up being unable to meet their loan obligations.
In California, as well as nationwide, for-profits lead the pack among institutions with the highest default rates on federal student loans, as California Watch has reported in the past.
Those factors combined to allow student borrowing to "remain robust at the cost of poorer performance," de Ritis concludes.
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