Crisis of generations – younger Americans moving back home in large numbers. Student loan default rates surging largely due to for-profit college expansion.
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The United States has over 4,000 college institutions many which have been raising tuition and fees far faster than the overall rate of inflation. Combine this with a younger and poorer population and you have a recipe for massive debt serfdom. As the recession drags painfully on, being the deepest and longest economic contraction since the Great Depression many people are questioning once deeply held mantras of economic prophesy. A home never goes down in value. You can’t go wrong with a college education. Of course these hollow statements mean little without further examination of the details. Buying a home isn’t necessarily a bad decision but it can be a bad decision if you over leverage yourself like a Wall Street investment bank. A college education is useful if you go to a quality institution but how many of the 4,000 are for-profit paper mills simply looking to steal money from unwitting students? The young are facing a challenging future but this pain is also leaking into the balance sheet of their parents.
Raising default
For-profit institutions now make up a large part of the college enrollment growth. Yet default rates are soaring for these institutions:
About a decade ago only 2 to 3 percent of college students went to for-profits. Today that figure is closer to 10 percent. What is more troubling is that they eat up 25 percent of all federal aid with very little results to show for it aside from healthy stock performance and large paydays for their CEOs. The chart above shows that most of the growth in defaults have occurred with the for-profits. The chart above is modest because it only looks at two years of data. In reality, the for-profits have default rates ranging from 40 to 50 percent.
The massive student loan debt bubble
It is now household knowledge that student loan debt is much larger than total credit card debt outstanding:
Unlike credit card debt however this debt cannot be discharged even through bankruptcy. Student loan debt is insidious because it really goes against the idea of risk taking in America. For example, if you overpay for a home you are welcome to walk away from the debt. This is why banks should be cautious and also responsible for some of the bad loans they make. The same applies to credit card debt. If you really can’t afford to make payments you can have it written off in bankruptcy. Yet with student loans this is not the case. They can and will garnish your wages, tax refunds, and even Social Security payments. To the contrary, the cronyism of the financial sector allows them to rob taxpayers and virtually walk away from any egregious risk taking.
The data speaks clearly to the subprime aspect of the college system:
Source:Â Chronicle of Higher Education
The large expansion in debt has come from for-profits but also larger public institutions. The inflation throughout the college system is large and predatory.
Boomerang back home
Now some would like to compartmentalize this into an ageist argument that the problems facing the young in our nation are largely their own problem to carry. Yet many are moving back home with mom and dad:
Now this data above is fascinating. This has to do with a variety of reasons including the weak economy and bursting housing bubble. The trend is unmistakable. Younger Americans are staying at home longer overall. A large reason for this has to with weaker economic growth:
Source:Â BusinessWeek
College is getting more expensive yet the return on investment is largely missing when it comes to overall wage growth. Again, this is where parsing the data makes sense. If you go to a top 100 or even 200 institution then you are likely to find a decent job but what about the other thousands of institutions? At the same time the burden of debt is even falling heavily on those that went to top institutors but majored in something with little employment options.
The data is looking troubling and many of us do not want to state what we are already seeing. We will have a younger generation of Americans with fewer opportunities and will likely be less affluent than their parents. This is hard to grasp for a nation that usually likes to see a better life for those who come ahead of us. Yet with the graft of the financial sector and the broken system with money seeking politicians it is no surprise that the large majority of Americans are sliding back into a time unrecognized.
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laura said:
In my generation, and the one before me, young people left home and worked, if they had to get a room mate to share rent, fine. They were far more responsible then. No credit cards existed except for the upper income folks, and young people had second hand furniture and didn’t buy all this crap made in China. We had simpler lives and more fun and recreation then any other generation. America is in a systematic structural meltdown, with a zero future. I’m now retired. If I was a young person today, I would not raise a family as America is finished.
November 14th, 2011 at 10:26 am -
Benjamin said:
Harvard Graduate, May 2011, Masters Degree, design school, can’t find a job that will allow me to pay off the loans yet, most classmates in similar positions.
November 14th, 2011 at 11:27 am -
Grant said:
Yeah I definitely fit into this group…but I moved to Canada so my poverty-level wages can’t be stolen, err “garnered” and I can actually afford to live on my own.
November 14th, 2011 at 11:37 pm -
clarence swinney said:
thanks again your charts are superb
November 15th, 2011 at 5:58 am -
Martin Zehr said:
Individuals make decisions and often live to regret them. Been there, done that. Lost my house during a divorce. The massive scale does make a difference here. The costs will be made up somehow and many people will suffer as a consequence. Can they be shielded? Should they be free to make others pay? There is a real quandry here and a lose-lose scenario is evident. If you presume that it is fair not to pay off loans, then there will be more stringent requirements for them as the risk is increased in such loans. If you obscure this you miss the obvious. Good times were not simply made in thin air. They were the product of sound financial policies that were abrogated and resulted in the recent financial crisis. Going back to sound financial practices means more co-signers, reducing the amounts disbursed and even increasing interest rates. State and Federal budgets are also raising expenses at colleges and universities. Those who want to simply ignore reality and wipe the slates clean, may have good intentions. But they do not offer good solutions. Cutting off aid to private colleges or lenders is going to have a cost as well. This is not about “unwitting students” manipulated to borrow money. These financial services have provided young people with an opportunity to improve their lives. Millions of students choose majors that they end up not using in their professional life. How do you avoid this? Student loans have been structured for years to address periods of financial difficulty by the borrower. Forebearance has always been there. Financial Aid offices have long been there to enable students to follow their dreams. Panic by the borrowers has not been there before. Adapting to difficult financial situations is a part of life. Prioritizing our own spending is based on what we can and what we cannot afford to spend on. WHAT!? Life is not fair? Lean years and fat years for people co-exist in all societies. Compare what the Depression and the WW2 generation had to face before you shake your fists at the world. There are lessons and there are people who will succeed in even the worst catastrophes through their own willingness to rise above the circumstances and others who simply outlast the worst and survive and some who will be broken by the whole thing. If something can be done that will be good, but don’t expect it to be done without a cost to others. And if something isn’t done, then swim to shore and don’t just tread water. Young people have a long life ahead of them and even though it seems so dark and bleak right now, they will develop new survival skills through this. It’s good to work with others to address what has happened and work to make things better. Let’s not forget though that no one has ever been promised a rose garden. I wish everyone luck and do not blame students for the burdens they are confronted with. The hole is deep but if you dwell on it for too long you simply will let yourselves be buried in the process. Take one step at a time. Address what you can and leave behind what you can’t. Find new ways that you hadn’t thought of before. One guy who posted choose to leave the country. Others move home or to other places that are less expensive to live or might find a job out of their given field. Others make decisions about what is feasible given their circumstances and what is unrealistic for the time being. Like the frog in the crane’s mouth with its hands on the crane’s throat, don’t give up. And focus on things that will help things get better for you and not make them worse for yourself in the process. We all learn through time that we often misspent our time and energy on things that really did not help deal with the difficulties in our lives. And we often miss the importance of our own capabilities and resources that emerge in times of difficulty. You are not alone, but neither will others be able to solve everyting for you. Be strong.
November 15th, 2011 at 1:30 pm -
Bud Wood said:
IMHO, Laura said it correctly. “We” have raised a generation of immature adults who collectively verge on irresponsibility. But, I suppose that goes along with the political “leaders” who appear to be the same.
From a practical standpoint, Grant seems to have an answer. It’s probably not a great answer, but appears to be a lot better that his contemporaries have figured out. In fact, for those who can put together the air fare, I understand that Australia and SE Asia are booming – – big jobs and big pay.
When I got out of college, many years ago, I had several opportunities. One opportunity was a job in the military because at the time the USA was in one of its many wars. Who says that the government can’t create jobs?! But I took a job in the defense industry; higher pay and less risk.
November 17th, 2011 at 1:52 pm -
TAD said:
Very good article. The reason young people cant find jobs is becuase the baby boomer generation was too fat and happy to see the damage of NAFTA, globalization and illegal immigration could have on future earnings for Americans. A system that rewards offshoring middle class jobs, bringing in cheap labor to supplant wages, and the ability for large US born corporations to evade their taxes by sheltering overseas has had a very large negative impact on our economic system. Combine this with our media/marketing/advertisement/realty TV loving culture, and you get this idead of instant gratification. It reminds of Whimpy from the old “popeye” cartoon who said, “I’ll gladly pay you Tuesday for a hamburger today.” Guess what? It’s Tuesday time to pay the piper.
The banking crisis was orchestrated. Greenspan was a rat jumping off a sinking ship. They stopped publically printing the M3 in 2004. They made tougher bankruptcy laws in 2006. They sold NINJA loans to illegal immigrants and people living on modest incomes. They bundled your mortgages into CDS’s and sold them all around the owrld to spread the contagion. Now they are beginning to go after public property for pennies on the dollar and replacing elected leaders of Italy and Greece with banksters and insiders. There is no accident about any of this timeline. The American middle class is made to suffer because we are the last line of people with voting rights, college level educations, and savings accounts. We can think for ourselves and we have a reason to be politically engaged. That is why we are made to suffer. There really is a NWO, and you are watching its birth pangs.
November 18th, 2011 at 4:02 pm -
TAD said:
Correction; some of us are capable of thinking for ourselves. Some of us take the time to understand the current events not just have them editorialized to us by some sensational news host. I love America, what it used to stand for. The new America, where criminals at the highest levels can get away with robbing the Treasury, declaring unjustifed wars based on frivilous at best “facts,” and where your own government now considers its own people as potential terrorists ain’t what I signed up for.
And my friends, please vote for Ron Paul in 2012. He has had the same voting record for 30 years in Congress. He doesn’t accept lobby money. He wants to audit the FED. And he doesn’t put Israeli interests ahead of American interests. Name another candidate, Democratic or Rebublican who can claim these things. Isn’t it time we moved America forward?
November 18th, 2011 at 4:11 pm -
Joe in JT said:
I went to a college in Maine in 1977 that went bankrupt, chapter 11. I took out a very small loan of about $800. I explained to the debt collector 30 years later that the school went bankrupt and didn’t fufill there part of the agreement, so I shouldn’t have to pay for schooling I didn’t receive. It fell on deaf ears. In the year 2001 I was expecting a IRS tax refund check of $800 but I receive $0. The treasury department had stolen my tax refund because of the student loan. My point is a student loan will follow you like an Alabama Police blood hound chasing a stinky, bloody escaped prisoner. You literally have to move to Canada to live a normal life.
November 18th, 2011 at 7:06 pm -
Deet said:
I didn’t think you could default on a student loan! Maybe they aren’t paying, but the debt is NOT washed away as in a default, it will be hanging around their necks until they die!
November 18th, 2011 at 8:25 pm -
fred said:
“Joe in JT”. You should have asked the debt collector to show you the signed contract he had with your signature ( your consent) on it..Obviously he couldn’t as you had not entered into a contract with him or the company he worked for.North of the border in Canada there are a few people who are endeavouring to educate the folks about the system.
It’s not that hard ,and you can tie these vampires up in knots if you have the knowledge Why don’t you read the work of Mary Croft i.e.”How I clobbered every financial institution known to man” don’t think that’s verbatim but with that you will be able to find it.
She also has another book on the net dealing I think with the spiritual aspects of what goes down. Also look into Robert Menard. (GOOGLE IT) . Also Robert Hay ” The extortion system of the ruling elite”and [ Freedom files .org] Good Luck- You can defend yourselfNovember 19th, 2011 at 12:12 pm -
cindy said:
@ Deet: i think you misunderstand the meaning of the word default. Default means they’ve ceased paying their monthly payments for, i believe, a year or more. the interest still accrues. you’re thinking of discharge, student loans are never discharged. i’ve defaulted on my student loans twice. i support a family of three on less than 10K a year. i still owe, as it will NEVER be discharged till it’s paid in full, with interest….lots and lots of interest.
November 19th, 2011 at 12:39 pm -
Meatwad said:
If you want to see the real value in education [or home prices] out law the use of a loan to pay for them. The price without being able to get a loan for them, will reflect the real value in them.
Loan sharking used to be a crime, a felony level crime.
November 19th, 2011 at 6:12 pm -
DTEJD1997 said:
I too have student loans. They are a life altering, ruinous thing.
There are a few things that this good article did not touch on:
A). Some “non-profit” schools are engaging in fraud. For example, the school will state that 98% of our graduates are employed within 9 months of graduation AND their average wage is 85K. Prospective (and new) students are induced into taking on ruinous amounts of debt on the BELIEF that the school is truthful in it’s advertising. The student thinks, “I don’t want to take on debt, but I can do it because of the increased earning power that I will have”. They think that EVEN if they are somewhat below average, they will still be able to pay off the debt. WRONG.
B). If you DEFAULT on your debt, you will have up to 20% tacked on as “penalty” & “processing” fees. In my case, I had 1 year of $1,400 a month payments that were “penalty” payments. The “penalty” payments did not count towards principal or interest. In hind sight, if I had known that, I probably would never have resumed payments on my loans. I don’t have a problem paying back what I owe, BUT I do have a problem paying $16,800 in penalties.
C). There are a lot of NEGATIVE tax implications for student loans. Society & the government pressures people into doing this. The government caps interest deduction at $2,500 a year. Once you start making more than $50k, you start to lose even that…
Student loans manifestly unjust if they are NOT dischargeable in bankruptcy. IBR is also a fraud!
November 20th, 2011 at 3:07 am -
and you were saying said:
be careful what degree you choose. if you can’t make $$ back from your “chosen” degree, you shouldn’t goto college for that degree and should just goto trade school already..you all have a choice man. game has changes. now a college grad are a dime a few thousand. useless papers…might as well learn how to cook well or fix a car, those are always needed. hell bill and steve never grad from college before they became billionares..so can you!
November 29th, 2011 at 2:05 pm -
Eugene said:
Welcome to capitalism. Capitalism works on a small and medium scale (invisible hand) and fails at large scale (corporate greed).
April 6th, 2013 at 1:21 am -
Laurel Moore said:
The student loan ecosystem is a financial scam. The Dept. of Education, which taxpayers fund, exists to hawk these loans to young people and make money for the financial community.
May 30th, 2013 at 8:21 am -
Homesteader1 said:
Thank you everyone for posting your experience with student loans here. The above comments are all record truths to what is actually going on with the student loan crisis.
I graduated with a business degree 5 years ago. I did not take student loans. However, I did have some life altering experiences to stay employed. I immediately left my mid-western family for DC where the job climate was more favorable. It took me 60 days to find a temporary job that paid 30K. When I told employers I had a degree they grinned and gave the look, “you all do…and?” Basically, it was a frenzy for employers to find the cheapest labor. I learned everyone was renting with multiple roommates because the cost of living was just too high…like $1600 monthly for a 2 bedroom.
During this time I met my husband, 40k in student loans. He had the same troubles finding work. We moved from MI, to DC, to VA, NJ, and then DE. In 3 short years. This was all for him to find quality work. When his income finally got to a moderate level I learned it PAID to stay home and manage our money. Our combined tax level went from 56% as individuals to 8%. We have mastered our legal tax strategy. We learned how to manage our money very well because we realized the more productive we became, the more would be taken from us in the form of taxes. DOES NOT MAKE SENSE!
I am convinced the tax burden has become so high people simply do not want to work. That’s how I felt when we had to surrender 40% in taxes to the gov for one bonus check. That only happened once. Never again.
Meanwhile we are paying these student loans. Which could never be eliminated through bankruptcy even if we had a financial emergency. This is the new scam locking citizens in to debt serfdom.
Although my peers find my opinions quite avant-garde I urge any young people to seek alternative path to formal education. I tell them to use their free time wisely and learn things online and go to the library constantly.
I think there is a small revival of “homesteading” practices brewing for many young people. I think this is happening out of necessity and the need to feel prepared with all these immature adults walking around.
Our future does not look as bright in a monetary sense but if you measure your worth by the dollars you will always be on the losing side of inflation. Many charts and graphs show this. “Time and freedom” is the new “dollar”
August 7th, 2013 at 12:09 pm