Economists: Student loan debt a concern, but is it next bubble?

Student loans are second-largest share of household debt

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March 28, 2014 | 2:56 pm

Outstanding student loan debt has more than tripled in the past decade, reaching almost $1 trillion nationally. It now comprises the second-largest share of household debt, right behind mortgages.

That's led to widespread speculation that student debt could be the economy's next bubble and the next bubble to burst with comparisons to the housing market and dot-com bubbles, as well as to the growing number of auto loans.

But several economists and Iowa student loan officials said they believe the growing student debt, while troubling and having the potential to cause economic ripples, won't be a bursting bubble that shakes the economy the way the housing market did.

The increase in student loan debt has been a long-term trend, rather than a sudden or cyclical change, which makes it different from a traditional bubble, said Sarah Watt, a Charlotte, N.C.-based economist with Wells Fargo Securities.

"It's a concerning long-term trend, especially when you see the debt burdens are more concentrated among certain age groups," she said. "But in a way we're not as concerned about it for a number of reasons."

For one, Watt said, mortgages made up 71 percent of household debt in 2012, while student loans were 8.5 percent, so it's a much smaller portion.

Also, most student debt about 90 percent is backed by the government via federal student loans, and those have backstops to prevent borrowers from discharging that debt in bankruptcy and also more flexibility in repayment, said Watt, who earlier this year coauthored a study on student debt.

But there are concerning numbers, experts have admitted.

More than twice as many households have educational debt when comparing 2010 to 1989, and the median educational debt rose to $13,000 in 2010 an increase of more than 60 percent in less than a decade.

Also, while most other forms of debt have fallen, student loan debt consistently increased since the recession, often at a double-digit pace. Student loans are now 8.5 percent of household debt, compared to 3.3 percent in 2003, Watt said.

Student debt levels vary significantly.

The average for graduates with debt at Iowa's public universities last year ranged from $23,575 to $29,573. Nationally, average student debt was about $24,000 in 2011, according to the College Board.

But 41 percent of University of Iowa graduates last year had no student debt, compared to 32 percent at Iowa State and 24 percent at the University of Northern Iowa.

For some students, the debt looks reasonable and repayable, but other students are clearly reaching too far, said Gary Fethke, a former UI business dean who has written about student debt. In 2012, median student loan debt was $12,500, he said, but average debt was double that which means high-debt borrowers pull up the average.

Default rates are important to watch, Fethke said, because it's a measure of ability to repay. The median default rates across nearly 4,000 public and private institutions range from zero to 68 percent, he said, with the highest rates at community colleges and for-profit institutions.

Nationally, four-year public institutions have a default rate of 4.5 percent to 5 percent according to various studies. Iowa's regent universities are below that.

"Interestingly, even with increasing default rates, the federal student loan program is profitable and it contributes to the reduction in the overall federal debt," Fethke said.

UI senior Chase Lampe expects to graduate this month with about $12,000 in student debt, well below state and national averages, but he knows students who owe much more. Lampe, co-chairman of the UI's presidential financial aid advisory committee, does worry about the effects escalating student debt may have on the economy.

"There are concerns about the amount of debt that people my age are building up these days and the job prospects on the other side of it," said Lampe, 23, a history and political science major. "I do think it will be a larger player in slowing economic growth because I think it holds a lot of people back."

The concern is that younger workers, especially, are less able to save for a downpayment on a house or a new car if they have high student loan payments. A New York Fed study shows 43 percent of 25-year-olds now have student debt.

"You might not get complete financial meltdown like you saw with the home mortgage market bubble, but it will have ripple effects," Watt said.

Universities and colleges are focusing on financial education for incoming and current students and their parents. One new UI program hired two graduate students to counsel undergraduates on money management and debt.

The program, funded with $120,000 in grant money from the provost's office, hopefully will reach students early on and influence how much they borrow through their college careers, said Sara Harrington, assistant director of student financial aid.

The private loan market is a smaller piece of student financial aid, but some lenders there also are working on financial literacy and education, noted Steve McCullough, president and CEO of Iowa Student Loan. That private not-for-profit organization, which has a for-profit subsidiary that runs a loan program and services loans for Iowa banks, uses the Student Loan Game Plan tool, which has helped participants reduce their planned borrowing, he said.

"Because people tend to take (private loans) on top of the government loans, we try and be very careful and give even more counseling," he said. 

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