There's new concern over student loans as more than 40% of people who borrow from the government are not making their payments. That's nine million of the 22 million people with student loans who may never be able to pay their loans.Is Hernandez correct?
Is Hernandez's analysis correct? And if so, does it matter?
Although the Fernandez did not cite a source for his 40 percent statement, I think he's right. Looking at data from multiple sources, here's how I get to a 40 percent nonpayment rate.
First of all, 43 million people have outstanding student loans. As the New York Times accurately observed last year, 10 million student borrowers have either defaulted on their loans or are delinquent. It is true that some people with delinquent loans will eventually bring their loans current, but a lot of them won't because unpaid interest will accrue during the delinquency period, making the loans grow larger and more difficult to repay. Theoretically, defaulters can also bring their loans current, but the penalties assessed against defaulting borrowers are unbelievably onerous; and once defaulters have penalties attached to their loan balances they are doomed.
Then we have 4.6 million people who have entered income-based repayment plans (IBRPs) that extend loan repayment periods out to 20 or even 25 years. Most of these borrowers are making payments so low that interest will continue to accrue, which means a very high percentage of borrowers in IBRPs will never pay off their loan principal. And this number grew by 140 percent in just due two years! I think it is safe to predict that within a year, at least 5 million people will be in IBRPs of some sort. So let's add 5 million to the 10 million people whose loans are delinquent or in default.
Finally, there are about 9 million people who are in economic-hardship deferment programs or loan forbearance programs of some kind that excuse them from making loan payments. Again, interest is accruing on these loans.
When we consider this data together, we can understand why more than half of college-loan borrowers are seeing their loan balances go up within two years of beginning the repayment stage (as reported by the Brookings Institution). This is a clear sign that a lot of borrowers are either not making any payments or are making payments so low that they are not paying down their loan balances.
Based on the analysis I just outlined, it is clear that Mr. Hernandez is right and that at least 40 percent of student borrowers are not repaying their loans, and most never will.
Does it matter?
From the perspective of society as a whole, does it matter whether students pay back their college loans? Yes it does. Steve Hayward, a professor at Pepperdine University, who was interviewed for Fernandez's story, said that colleges are delivering an inferior product, "and I think there is a bubble coming." In fact, Hayward went further and said if colleges were publicly traded, he would short them.
Hayward has it right. Let's look at Apollo Education Group, the owner of the University of Phoenix. Apollo once traded at $80 a share and now trades for about $8. If you had shorted Apollo, you would have made some money.
Basically, I think what Hayward was suggesting is this: The government cannot go on forever loaning billions of dollars a year to college students when a high percentage of college borrowers are receiving inferior educational experiences and aren't paying back their loans.
In fact, higher education is in a bubble right now. Hundreds of private liberal arts colleges and for-profit colleges are struggling to survive and could not survive 30 days without federal student aid money. They are like drug addicts who must have federal dollars flooding into their coffers just to survive from month to month.
But the government cannot keep loaning more than $150 billion a year in student-loan money if 40 percent of the borrowers don't pay back their loans.
The Obama administration and the entire bloated college industry are relying on a single strategy to keep the gravy train rolling: long-term income-based repayment plans. If they can force the kiddies into 20-year or 25-year repayment plans with lower monthly payments than the standard 10-year repayment period, they think the party will go on forever and the bubble will never burst.
But the party won't go on forever, and the bubble is about to burst. Within five years, we will see dozens of colleges close their doors because more and more students will simply refuse to pay outrageous tuition prices for degree programs that don't lead to good jobs. And we will see nonpayment rates go higher than they are now, and they already pretty damn high.
In fact, the student-loan bubble is already causing more suffering than the home-mortgage bubble. According to the text at the end of the movie The Big Short, about six million people lost their homes during the home-mortgage crisis of 2008 But those people could file for bankruptcy and get a fresh start. More than 20 million people are burdened by unmanageable student-loan debt, and most of them cannot get relief in the bankruptcy courts..
Henry Fernandez. 40% of Students Aren't Paying Back the Government. Foxbusiness.com, April 8, 2016. Accessible at http://www.foxbusiness.com/features/2016/04/08/40-students-arent-paying-back-government.html