Monday, April 23, 2012

Albert Lord Says Student Loan Program is Not in a Bubble: Should We Believe Him?

Albert Lord Says Student Loan Program is Not in a Bubble
Albert Lord
CEO, Sallie Mae

According to recent news stories, Albert Lord, CEO of Sallie Mae (SLM Corp.)  rejected any claim that student loan debt has reached dangerous levels.  “We don’t see anything of any evidence close to a bubble,” Lord said in a conference call to financial analysts. “This country underwent a significant financial crisis in our very recent past. It’s not really a surprise that many see bubbles around every corner” (Mulholland, 2012). 
So Mr. Lord assures us the student loan program is not in a bubble. Should we believe him?
No, we should not. First of all, as everyone knows, the percentage of students who borrow money to attend college is going up and students' average indebtedness is going up as well.   Moreover, annual student-loan default rates have almost doubled between 2003 and 2009—going from 4.5 percent to 8.8 percent.  And these numbers only reflect the numbers of students who default within two years after beginning repayment.  When the default rate is expanded to measure defaults during the first three years after repayment begins, the rate goes up substantially—especially for students who borrowed money to attend for-profit colleges.  According to one projection, the three-year default rate for the 2009 cohort is 29 percent for students who attended for-profit schools.  (Lederman, 2011). Surely this is a sign of serious trouble ahead for the student loan program.
We should also look at some recent reports by outside analysts when we assess Mr. Lord’s assurances about the student loan program. The Federal Reserve Bank of San Francisco, in a 2011 publication, reported that private lending increased dramatically from 2000 to 2007, reaching 26 percent of all student loans during the 2006-2007 academic year. Private loan volume then retreated from a high of $22.6 billion in 2006-2007 to only $7.9 billion in 2010-2011.  (Choi, 2011). This may be an indication that the private banking industry has concluded that student loans are becoming riskier for banks, in spite of the fact that these loans—like federally guaranteed loans—are almost impossible to discharge in bankruptcy.
In a 2012 publication, the Federal Reserve Bank of New York reported that total outstanding student-loan indebtedness has reached $870 billion, surpassing the nation’s entire outstanding credit-card balances and its outstanding car-loan balances. According to the New York Reserve Bank, there are about 37million people with student-loan balances, Sixty percent of these borrowers are 30 years old or older, and about 27 percent of all borrowers have at least one past-due student-loan account.  Seventy-five percent of individuals with past-due student-loan accounts are 30 years old or older, and 40 percent are 40 years older or older.  These numbers tell us that a lot of people are struggling with student-loan debt well into midlife. 
In addition, Moody’s issued a report in July 2011, which is sharply different in tone from Mr. Lord’s optimistic reassurances. “The long-run outlook for student lending and borrowers remains worrisome,” the Moody report stated. “[T]here is increasing concern that many students may be getting their loans for the wrong reasons, or that borrowers—and lenders—have unrealistic expectations about borrowers’ future earnings.” Moody’s warned that “[u]nless 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” (Moody’s Analytics, 2011).
In my opinion, Mr. Lord is wrong to say the student loan program is not in a bubble. Independent analysts see trouble ahead.  As I have written earlier, there are many things we can do to ease the burdens that weigh down overstressed student-loan borrowers.  But the first thing we must do is face reality and admit that the student loan program is out of control.
References
Choi, L. (2011, December). Student debt and default in the 12th District. San Francisco: Federal Reserve Bank of San Francisco. http://www.frbsf.org/publications/community/research-briefs/Student-Debt-and-Default-in-the-12th-District.html (last visited April 23, 2012).
Brown, M., Haughwout, A., Lee, Donghoon, Mabutas, M., & van der Klaauw, W.(2012). Grading students loans. New York: Federal Reserve Bank of New York.  http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html (last visited April 23, 2012).
Deritis, C. (2011, July). Moody’s Analytics: Student Lending’s Failing Grade.


Lederman, D. (2011, May 23). Trouble ahead on student loan defaults. Inside Higher Educationhttp://www.insidehighered.com/news/2011/05/23/student_loan_default_rates_rise_sharply_especially_for_for_profit_colleges (last visited April 23, 2011). 
Mulholland, S. (2012, April 19). Sallie Mae CEO Albert Lord Rejects Education Loan Bubble Claims. Huffington Post. http://www.huffingtonpost.com/2012/04/19/sallie-mae-ceo-albert-lor_n_1438595.html (last visited April 23, 2012).

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