Saturday, September 11, 2010

The Student Loan Bubble: Deflating Just a Bit?

The three charts below help tell part of the "higher education bubble" story by looking at student loan volume using data from the Department of Education.  The first chart shows the actual gross student loan volume from 1994 to 2007, and the projected student loan volume from 2008 to 2017.  Here's what happening:

1. Between 1994 and 2006, student loan volume expanded by almost 7 times, from $23 billion in 1994 to $156.6 billion, for an average annual increase of more than 17%.

2. From slightly less than $40 billion in 1998, student loan volume more than doubled to $80 billion in just five years by 2003 ($87.5 billion), and then almost doubled again over the next three years, reaching $156.6 billion by 2006. 

3. After decreases in student loan volume in 2007 and 2008, the Department of Education predicts ongoing increases starting this year, reaching $214 billion by 2017, which will be 10 times higher than the amount in 1994.

Part of the increase in total student loan volume is from the increase in the number of student loans, which has more than tripled from 6.5 million borrowers in 1994 to almost 20 million borrowers this academic year.  The chart below shows the actual average student loan amount from 1994 to 2007 and the projected amounts from 2008 to 2017.  

1. The average student loan amount almost doubled between 1994 to 2005, from $3,543 in 1994 to $7,311 in 2005, and reached a peak of $8,706 in 2006.  

2. Following declines in 2007 and 2008, average loan amount started increasing again in 2009, and is projected to top $8,000 again by 2015.  

Of course, the dollar amounts above have not been adjusted for inflation or compared to income levels, so the chart below shows the average student loan amount as a share of median household income, from 1994 to 2008.

1. After remaining stable at about 11-12% of median household income between 1994 and 2001, student loans as a share of income climbed to more than 18% in 2006, before declining to 15.5% in 2007 and 13.6% in 2008. 

2. Another way to look at student loans: In 1994, median household income ($32,264) was about 9 times the average student loan amount of $3,543, but by 2006 median household was earning income ($48,201) that was only 5.5 times the average student loan amount of $8,706. 

From Glenn Reynolds in the Washington Examiner:

"As with the housing bubble -- cheap and readily available credit has let people borrow to finance education. They're willing to do so because of: 1) consumer ignorance, as students (and, often, their parents) don't fully grasp just how harsh the impact of student loan payments will be after graduation; and 2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

Student loan demand, according to a recent report in the Washington Post, is going soft, and students are expressing a willingness to go to a cheaper school rather than run up debt. Things haven't collapsed yet, but they're looking shakier -- kind of like the housing market looked in 2007."

MP: The data in the charts above do support the fact that student loan demand has been going soft in both 2007 and 2008, and part of that might be the effects of the recession.  But hopefully it's also because reality is setting in, and students and their parents are becoming more cost-conscious and now less willing to run up huge amounts of student loan debt.  When just the average student loan amount (and many students have more than just one student loan) is approaching 20% of median household income, like in 2006, that seems like an unsustainable situation.  As Michael Barone wrote recently:

"Government-subsidized loans have injected money into higher education, as they did into housing, causing prices to balloon. But at some point people figure out they're not getting their money's worth, and the bubble bursts." 

Hopefully, the recent declines in student loans (the average loan declined by almost $2,000 from $8,706 in 2006 to $6,830 in 2008), means that the higher education bubble might be deflating just a little bit.  


At 9/11/2010 10:19 AM, Blogger Lisa Renehan said...

Unfortunately for those of us with kids college age and approaching college age, the bubble bursting on the demand side won't alleviate our dilemma - it's not until the institutions figure out that they have to offer a cheaper product that things will come into balance. We want the small classes and learned professors and well-equipped labs at the high end colleges. We assuredly don't want the over-paid cook staff with full pension benefits, bloated administration or lavish social services heaped on the students.

At 9/11/2010 10:43 AM, Blogger morganovich said...

i'm not sure i know how to interpret the magnitude of these numbers.

so, we go from 30bn in debt to 160 bn. that's a big jump in % terms.

but these numbers don't seem to make sense as annual origination numbers.

total combined revenue of all US colleges is:

$464,915,537,724: The total combined revenue that comes into all US colleges in a year

22% of that comes from tuition

so tuition is roughly $102bn.

that would imply that loan origination is over 150% of tuition, which is clearly untrue unless loans are made for the whole 4 years in advance. is that the case?

if that is so, then loans are still something like 37% of annual tuition, which seems high to me, but might be possible.

if the number is that high, then it would certainly be driving tuition inflation. the availability of debt always does. look at a real estate market in which mortgages become available for an excellent example of this.

At 9/11/2010 2:26 PM, Blogger PeakTrader said...

Education has a positive effect on income (or GDP), which may help explain why U.S. real per capita GDP increased at a faster rate after WWII.

Also, smoothing-out business cycles, since WWII, likely had a positive effect on real per capita GDP (since resources were utilized more efficiently).

Moreover, the increasing percentage of women in the workfore likely had a positive effect on real per capita GDP. Of course, there are positive and negative factors.

Census Bureau Reports Nearly 6 in 10 Advanced Degree Holders Age 25-29 Are Women
APRIL 20, 2010

"The data also demonstrate the extent to which having such a degree pays off: average earnings in 2008 totaled $83,144 for those with an advanced degree, compared with $58,613 for those with a bachelor's degree only. People whose highest level of attainment was a high school diploma had average earnings of $31,283."

At 9/11/2010 3:20 PM, Blogger sethstorm said...

How about switching to a system where only the internationals pay? US students get priority, on a merit-blind basis.

You only justify a system where it is harder to not hire.

At 9/11/2010 6:39 PM, Blogger bob wright said...

morganovich said:

"that would imply that loan origination is over 150% of tuition, which is clearly untrue unless loans are made for the whole 4 years in advance. is that the case?"

Student loans can be used to pay for tuition, room & board, books, even lap top computers.

At 9/11/2010 6:57 PM, Blogger Mark J. Perry said...

There are about 19 million Americans enrolled in college according to the U.S. Census Bureau. The average cost of undergraduate college (tuition + room/board) is about $18,000, which would be about $342 billion per year.

Then take into account the fact that student loans cover more than just one year's worth of expenses, and the $120 billion in student loans outstanding doesn't seem out of line.

At 9/11/2010 7:29 PM, Blogger PeakTrader said...

From article:

"It is likely that the causation works both ways: higher GDP per capita means better education (because of more investment in education) and better education means higher GDP."

At 9/11/2010 7:56 PM, Blogger bob wright said...

How much of this borrowed money is being spent on remedial classes for students to learn what they should have learned at no cost in high school.

USA Today says one-third of American college students have to enroll in remedial classes

Additionally, how much of this money is borrowed by students who don't graduate?

From the Detroit News:

Of the 15,478 WSU students who were enrolled in fall 2007, an average of 9.5 percent of black students graduated after six years between 2006-2008, the report showed. That compares to 43.5 percent of white students who earned a diploma, trailing behind the national average of 56 percent.

At 9/11/2010 8:07 PM, Blogger PeakTrader said...

From (another) article:

"Within the United States, researchers have found that when holding an individual’s own years of schooling constant, that individual’s earnings increase by around 9 percent as the share of college graduates in that individual’s metropolitan area increases by 10 percent.

If you work around skilled people, you earn more, either because you have learned from those people or because more skilled entrepreneurs make production more efficient."

At 9/11/2010 10:28 PM, Blogger Ron H. said...

Thanks for the interesting articles, bob wright.

From the USA Today article:

"Like many college students, she wishes she'd been worked a little harder in high school."

Did she really mean to say she wishes SHE had worked a little harder in high school? Whose responsibility is it anyway?

"There's a gap," said Jeronimo, who hopes to study psychology. "The demands of the high school teachers aren't as great as the demands for college. Sometimes they just baby us."

Hmmm...I think that could be the problem in a nutshell.

At 9/11/2010 10:51 PM, Blogger PeakTrader said...

The charts may be further proof that improvements in U.S. living standards were greater during the 2002-07 bubble than the 1995-00 bubble (and in a structural bear market that began in 2000), and real per capita GDP doesn't fully capture the improvements in living standards.

At 9/23/2010 10:37 AM, Blogger Yoghurt said...

The process of applying for a business loan is a stringent one as compared to the standard procedures in obtaining a home mortgage loan or a personal loan. This is probably due to the fact that business loans contain a greater risk element as compared to other loans. Therefore, lenders need to exercise greater caution and emphasis when evaluating business loan applications in order to minimize their risk exposure.

With that, lenders evaluate their applicants based on the information that are provided as well as their judgment of the viability and profitability of the business being financed. Thus, business loan applicants will be required to submit a loan proposal along with their applications with the purpose of creating a positive impression upon the lender.

The first element of a loan proposal is an executive summary, providing short descriptions of the type of business and the industry, the purpose and usage of the loan, the proposed repayment conditions as well as the intended loan period. After that, the company information is provided, enriching the reader with the nature of the business, the location of the business, company history, the products or services provided, key differentiation factors of the company or the product, the general growth of the industry, competitive information, growth potential and target customers.


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