Will student loan debt be the next bubble?

Compared to the rest of the nation, Washington state college students finish school with less debt

Clark College

Earlier this month when the Building Industry Association put on its annual Legislative Review Luncheon, with the Greater Vancouver Chamber of Commerce as a partner, the subject of student loan debt and its effect on the economy came up. Out of that conversation, an interesting question was raised: Could increasing levels of student loan debt in this country lead to the next recession? Could it constitute the next “bubble?”

In search of answers, we turned to Scott Bailey, regional economist with the Washington Employment Security Department (WESD). To begin, Bailey said that student loan debt isn’t subject to a bubble-type of valuation.

“A bubble occurs when something is overpriced,” he said. “The value goes way up and then we have a Wiley E. Coyote moment where we look down and see a large drop. “Student loan debt isn’t something that’s valued that way.”

While “bubble” may be an inaccurate way to describe the state of student loan debt in the U.S., Bailey said that doesn’t mean it isn’t a problem.

“Instead of being able to save up for a down payment for a house or a car, for example, students see a fair amount of their discretionary income going to pay off student loans that they’re struggling with,” he said. “With a job market that’s less than rosy for new grads, student loans are more of a burden than they were before the financial meltdown.”

According to The Institute for College Access and Success (TICAS), the average amount of debt for Washington state college students in 2013-2014 was $24,418. During that academic year, said Rachelle Sharpe, deputy director of the Washington Student Achievement Council, more than 99,000 students took out loans for higher education, and 89 percent of those demonstrated financial need. The number of students turning to loans to pay for school and the amount that each student borrowed increased during the Great Recession. However, Sharpe noted, the average annual amounts borrowed have not increased in recent years.

“That is due in part to no change in public tuition in the last few years and the fact that many students are borrowing at federal limits (there is no room to borrow more),” she said. “A dependent student who is a freshman, for example, cannot borrow more than $5,500 in the federal Stafford loan program. Also, if you look at the Project on Student Debt, the average amount of debt for Washington bachelor’s degree receivers was $24,418 and 58 percent of graduates had debt. The University of Washington-Seattle was less with $21,263 and 47 percent – less than half of those who graduated had to turn to student loans.”

The U.S. Department of Education released the official three-year cohort rate for Fiscal Year 2011 student loan default last July. Analysis of data from 103 schools showed that the state has a borrower default rate of 11.8 percent.

This means that from those 103 schools in the state, approximately 7,928 of the borrowers who entered repayment on Federal Family Education Loans (FFEL) or William D. Ford Federal Direct Loan (Direct Loan) programs during the 2011 fiscal year defaulted before the end of the 2012 fiscal year. The 11.8 percent default rate is nearly two percent below the national three-year cohort rate for student loan default (13.7 percent).

At Clark College, a Vancouver-based community college, students carried an average of $5,143 in loan debt during the 2012-2013 academic year, according to Karen Driscoll, the school’s director of financial aid. The average for all community and technical colleges in the state for 2012-2013 was $5,600.

During the 2014-2015 academic year, nearly 3,000 students took out federal loans to pay for college and students at Clark College borrowed more than $15 million in federal and private loans.

“The Financial Aid Office takes into consideration a student’s total cost of attendance – that includes living expenses,” said Driscoll. “The majority of our students borrow to supplement living expenses [like] food, housing and public transportation costs.” Driscoll added that Clark College’s default rate is 19 percent.

At Washington State University, including the Vancouver campus, 59 percent of students in the class of 2013 graduated with debts, and the average amount of that debt was $23,952, according to TICAS data.

Offering perspective from within the financial industry, Jason Vasquez, communications director for Wells Fargo’s Consumer Lending Communications Department, said that while student debt is growing across the nation, the private student loan market holds a somewhat small portion of the loans.

“The private student loan market is $93 billion. Federal loans account for $1.1 trillion of the $1.2 trillion in student debt, and $1.1 trillion of that is on the American taxpayers,” he said.

Vasquez said that his company is the second largest lender for private educational funding. In the first quarter of 2015, the financial institution’s private student lending portfolio included $12.2 billion in outstanding loans, up from the fourth quarter of 2014, when $11.9 billion was recorded.

“There is no evidence, from my personal research, that this (student loan debt) is in a bubble or a boom,” Vasquez said.

“Wells Fargo recognizes that paying for an education is one of the most critical financial events for our customers and is committed to ensuring their financial success by providing information and guidance throughout the customer relationship,” he added. “Prudent underwriting and providing quality timely information, transparency and financial education for each customer has allowed for 98 percent of our private student loan customers to be current with their loan payments.”

In addition to larger portions of a student or new graduate’s discretionary income going to pay off their student loans and affecting their ability to save for large purchases or a new home, there are other factors to consider. Student loan debt is the only type of debt that cannot be discharged in the event of a bankruptcy.

State budget leads nation in tuition cuts

One way to alleviate student loan debt is to reduce the cost of higher education, which is exactly what recently-passed Senate Bill 5954 aims to do.

The bill, included in the budget signed last month by Governor Jay Inslee, cuts tuition 5 percent this fall at Washington’s 34 community and technical colleges. Additionally, over the next two years, the law calls for a drop of 15 percent at UW and Washington State University and 20 percent at the three regional universities and The Evergreen State College.

After 2016, state college and university tuition may go back up, but only as fast as the annual average percentage growth in the median hourly wage for Washington for the previous 14 years.

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