Why Those Student Loans Aren't Getting Paid Off

Tyler Durden's picture

Submitted by Ryan McMaken via The Mises Institute,

Last month, the US Department of Education admitted that a much larger number of students are defaulting on student loans than previously reported. According to the Wall Street Journal

[T]the Education Department released a memo saying that it had overstated student loan repayment rates at most colleges and trade schools and provided updated numbers.


When The Wall Street Journal analyzed the new numbers, the data revealed that the Department previously had inflated the repayment rates for 99.8% of all colleges and trade schools in the country. The new analysis shows that at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years. [Emphasis added.]

An earlier report released in April had stated that "More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind."

44 million Americans have at least some student loan debt for a total of 1.26 trillion dollars. The overall delinquency rate for these loans is 11.1 percent. 

If that seems like no big deal, just imagine if we were talking about similar numbers for home loans. 

In the days following the foreclosure crisis of 2008 and 2009, approximately ten percent of home loans were 90-days delinquent. But today, in a period when employment and earnings are vastly better than what they were in 2010, the delinquency rate for student loans is more than 11 percent, and has been that way for four years. Imagine if we were told that, year after year, more than one in ten homeowners simply weren't making payments in the midst of an economic expansion. It would be deemed an unsustainable disaster. And yet, that's what we're seeing with student loans right now. 

Indeed, the comparison with home loans appears apt, and can offer us some insights into what's wrong with the student loan process. 

Students Loans Should be Priced According to Major 

As with student loans, home loans are subsidized in a variety of ways, and this tends to drive up the price of the product being subsidized. But, with home loans, the terms of the loan are still at least partially based on the likelihood that the borrower will be able to pay back the loan. A borrower with low income and a poor credit history is going to pay more in interest and fees. 

But, this is not how it's done with student loans. If student loans took default risk into account the way home loans do, students seeking engineering degrees or - other degrees that typically lead to higher wages - would cost the borrower less than would loans made to philosophy and art history majors.

We already know, for instance, that recent graduates with economics degrees tend to pay much less of their earnings toward their student loans than do philosophy majors. 

This is illustrated in a helpful calculator produced by the Hamilton Project at the Brookings Institutition in which students can calculate his or her likely debt burden based on program of study. 

In the comparison below, we find that in the first year after graduation, an economics major (green) pays nine percent of income toward debt service. Meanwhile, the philosophy major (blue) pays twenty percent of income toward debt service. These totals decline over time as earnings increase, but at no point in the first decade after graduation does the economics major approach the same debt load as the philosophy major. 

Now, if student loans were more guided by market principles, and less guided by government policy, a student loan for a philosophy major would require higher interest payments than the economics major. Simply put, lending money to a philosophy major is a riskier proposition than lending it to an economics major. The interest rate would reflect this. 

Should We Just Give Students More Time?  

But maybe we just need to give students more time to pay off those loans? After all, as the Brookings Institution metric showed, the monthly burden of loans goes down quickly over time as earnings increase. 

The problem in this case is that allowing students to simply defer their loans out five or ten years until their earnings go up is much easier said than done. In real life, if a borrower wants to take longer to pay off a loan he or she is going to end up paying more back in interest payments. Wouldn't it be nice if all new homeowners received a ten year grace period before they had to start making payments? This is rarely done because we know what such a grace period would really mean. It would mean that borrowers would ultimately have to pay more in interest, and would likely have to make payment for a longer period as well.  

Moreover, for younger student borrowers, other life goals and needs are going to end up taking precedence over paying off student loans as time goes on. As their earnings increase, younger borrowers will become more interested in purchasing a house, staring a business, and having children. Yes, it's true that earning will go up over time for many borrowers, but so will other expenses. 

The picture isn't much better for older borrowers. The Boston Globe recently featured two Baby Boomers in their 60s who are still often repaying student loan debt from decades earlier:

But [Annette] Pelaez and [Jane] Patrick aren’t fresh-faced graduates or even millennials. Both 63 years old, they are among the fastest-growing segment of borrowers burdened by student loans: Americans over age 60.

“I thought I would have paid them off a long time ago,” said Pelaez, who would like to retire in the next few years from her elder care job but owes $37,000 dating to the 1990s, when she returned to school to get master’s and doctoral degrees

Clearly, giving borrowers "more time" isn't the cure-all some advocates suggest. 

On top of this, we might add the fact that student loans tend to be given out in amounts in excess of what even the students themselves report they need. The New York Times recently reported that: 

More than half of students did not bother to calculate their postgraduate loan repayments, according to a report by the Global Financial Literacy Excellence Center at George Washington University, using data from the Finra Investor Education Foundation’s 2015 National Financial Capability Study.

According to a new study by NerdWallet, a financial tool website, nearly half of undergraduate students say that they could have borrowed less and still have afforded their educations. “On average, they said they borrowed $11,597 more than they needed for undergraduate study,” the NerdWallet report said.

Student loan money is so easy to come by that the students aren't even bothering to see if their degree program has the potential of providing relative ease in repaying loans. 

This isn't to say that the only purpose of formal education is to increase earning potential. People may pursue degrees for a variety of reasons, and education is, quite frankly, a consumption good for many people who simply like going to school or having a degree hung on their wall. 

Are we to believe, for example, that the 63-year old [Annette] Pelaez pursued her graduate degrees because she couldn't make a living wage otherwise? Was she just scraping by for forty years with her bachelor degree until economic necessity forced her back into school to finally finish that PhD? 

In a functioning private marketplace for student loans, how would a lender price a loan made to an aging graduate student in her sixties? Are earnings likely to go up for that student as she approaches age 70 in a few years? Will she work 50-hour weeks in her late sixties to ensure she pays off her PhD loan quickly? That's unlikely, and loans would be priced accordingly. 

Unfortunately, that's unlikely to happen any time soon. Since a formal education at a pricey university is now considered to be a "right," nearly all students have access to subsidized, low-interest loans regardless of the likelihood that the degree program will actually assist the student in ever paying the money back. 

If we're looking for reasons why delinquency rates on student loans are so high, we shouldn't have to look very hard.


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Bill of Rights's picture

Some way some how this will be Trumps fault

FriendlyAquaponics's picture

I must be the worst example ever. I actively discourage Young Humans from a University "education". In six months, you can learn everything on the internet that you would learn in four years at Uni, without the terrible snowflake peer influence. And that's even without having to go into indentured servitude by taking on debt that CANNOT BE DISCHARGED.

Grow more food.

Bill of Rights's picture

Funny I can learn anything I want in hours on YouTube...

FriendlyAquaponics's picture

A bachelor's level education from YouTube in just a few hours? In a hard science such as Chemistry or Engineering?

Good on you, mate.

847328_3527's picture

Colleges should be forced to hold 20-50% of the loan so they have more incentive. Same with banks and mortgages.

No reason to move all the risk on taxpayers who had nothing to do with the contract/loan formation.

You would see an end to this frivolity fast.

AldousHuxley's picture

No....liberal arts should be even more costlier to subsidize engineering and science education. Let the liberal arts idiot pay for a biomedical engineers working on curing cancer.

if you want free real liberal arts education you can get $50k scholarship to attend this one for free: Deep Springs College

No artsy fartsy stuff there....liberal art kids get up at 6am and work the farm prior to appreciating Plato, Bhudda, Marx, etc.. Even real feminism there...by male prof to discuss the merits amongst all male colleagues. No time for trust fund babies with dorm maid service to act like a SJW BLM whiney. Like survivor for college kids.

Most of them transfer over to ivy league after 2 years.




AldousHuxley's picture

on a second thought, if you just want high ROI on your "education", then just get a bus driver license..


California bus drivers make six figure salary + $50k overtime + pension:



And after 30 years (50 years old) you have pension worth $2million:




froze25's picture

So wait a second, you are trying to tell me that my degree in "Lesbian's of Color and their affect on Contemporary America" will not be a highly sought after skill set? I spent $48,000 on that? Why would they offer it if it wasn't useful?

AldousHuxley's picture

Well, in California, with that bs degree and a driver license, you can make $200k all in driving a bus.

Liberal's picture

Obama said I should go to college so I done did.
Obama said he gon gif me a free house so I waited but unfortunately he was overthrown by a dictator! Now I'm in debt up to ma neck but I ain't payin until Obama returns to the White Haus and gimme ma free house!

nufio's picture

I fully support that :https://nces.ed.gov/programs/digest/d15/tables/dt15_322.10.asp?current=y...

I do think some level of graduation in liberal arts, social sciences, psych etc is needed, but really they should not be funded by student loans. small budgets by govt scholarships perhaps. Certainly not 70-80 % of useless degrees as the data shows.


Skateboarder's picture

Having a fat loan to your name for a substandard education is hardly the menace. From the recent sociological and philosophical changes that are happening at universities all over the west, it's hard to miss the deliberate effort in a very slimy indoctrination. This is more than about just your money. They want YOU.

Krungle's picture

Well we could just tell the banks that they are responsible for bad loans just as they are bad car loans. The present system has the government backing the risk, but the bank gets all the profit. You know what would make banks loan responsibly? Allow students to dischage student loan debt in bankruptcy. That will very rapidly rid the world of student loans. No one is going to give a teenager a 50k or 100k credit line. As with most things, this problem was engineered by banks who wanted all the profits but none of the risk, thus encouraging bad behavior by everyone else downstream. It is literally that easy to instill discipline back into the lending process. But like mortgages or other areas where the banks have convinced the government to cover their risk, they make bad loans over and over again. 

Alternately we could just pay for higher education. And this would be the real kicker--make public colleges competitive. But not competitive in the inflated grade sense we presently have. Funnel a small fraction of gifted students into publicly subsidized colleges to study actually productive areas. Want to be a doctor? Great. An engineer? Awesome. Chemist, biologist? Fine. Free STEM degrees for the best and brightest. Other programs? The schools can keep them if they want, but they'll have to charge tuition. If you want to be an SJW, you'd best find a sugar daddy to pay for your private school tuition. If a college wants to continue having a professional sports team manned with unpaid labor? Great, get funding from the alumni. You could get rid of so many problems by making useless departments fold up, and forcing kids that shouldn't be in college to look into other avenues. This would also incentivize (or should) K-12 to actually produce graduates who can enter the workforce at 18, instead of dummies that need remedial education for 4 years of college. And you can leave community colleges open--there are kids, and I was one of them, who don't know what the fuck they want to do with themselves at 18 and are unfocused for a variety of reasons, and they need a gateway to figure that out affordably so they can transition into university when and if they are ready. Everyone else can get trade school certificates. For fucksake we have entire degree programs (w/graduate degrees) for churning out HR people and glorified secretarial staff. I'm pretty sure you can fit that into an 18-month program with on the job training for a few grand. Make everyone responsible and they'll eventually adapt....

Bill of Rights's picture

I have a degree in Engineering, many moons ago, but I discovered trading in my early 30's and retired in my mid 40's thanks to Ben and his loose money policies.

So the degree is useless to me at this stage and besides I know many people with degrees who are as dumb as stumps.

AldousHuxley's picture

trading is zero sum. 80 % losers, 20% winners..some just lucky. Don't mistake luck for ability unless you prove it over and over and over again otherwise it was just dumb luck my friend. 

Engineering is where you learn not to mess the world up with much higher success rate. Imagine 80% of bridges falling down while 20% succeed. ...

and financial engineering is not real engineering.





curly's picture

Wish I could upvote you more than once.


GunnerySgtHartman's picture

I must be the worst example ever. I actively discourage Young Humans from a University "education".

Sir, you are an EXCELLENT EXAMPLE and I agree with you.  If I had a kid who was in junior high or early high school, I would actively encourage said kid to go learn a trade rather than get a useless 4-year (5? 6? 7?) "education."

I wanted to learn a trade, but was pushed to go to college - so I did.  Do I have regrets?  Not really, I do OK and have no complaints.  But things have changes so much in the nearly 25 years since I got out of school that college would be a non-starter these days.

FriendlyAquaponics's picture

I am a highly-degreed person who is lucky enough to be married to a Maker with only a high-school diploma. As I am fond of saying, he is a Master of the Physical Universe, while I am but a lowly apprentice, because he knows how to Make things while I only know how to break them.

I spent over seven years in college, and for the most part, it was a total waste of time. Didn't teach me how to do much of anything except think, not Make.

Skateboarder's picture

Academia is a bottomless pit of self-congratulation and tenure disease.

MalteseFalcon's picture

The underwriter of the loan must be responsible for the loan results.

No laying it off onto government.

The underwriters should be subject to stringent government regulation.

I hope at some point under performing student loans are given to private collectors and the collectors are given wide leeway to collect.

Being chased by bounty hunters is just what these snowflakes need.


847328_3527's picture

Exactly! That's what I said above before I read your comment. The circus would stop immediately and only solid/valid loans would be made.

BidnessMan's picture

Underwriter? If you can fog a mirror, you can get as much student loan money as you want.

chunga's picture

Yes, it's a huge racket. As I've said probably a few too many times already, the bankers have found a solution to the problem of how to steal money from people who don't have any, and that is to simply give it to them.

Sounds silly but it's true. The education piece of this is merely notational.

malek's picture

Well we all know how this movie ends:

The bureaucracy implements requirements to have a university graduation certificate to work in a better paid job -
only "for the safety" of course.

AVmaster's picture

I worked three jobs for 8 years to get my degree. 




But my 69' charger and very well equipped man caves totally makes up for it... Oh, and the wife/kids being fully decked out and not having to worry about money is a plus...


These kids just want this shit GIVEN to them... Hard work ethic is totally gone...



Hammer823's picture

And now YOU get to work to pay for THEIR free degree.

847328_3527's picture

Deduct student loan defaults from that university's teacher's retirement fund or their endowment.

Why should strangers...taxpayers foot the bill?

Sounds reasonable.

AVmaster's picture

must've missed the part where I said "and not having to worry about money is a plus"...


But dumbshits will be....



Yukon Cornholius's picture

Aren't kids that are "fully decked out and not having to worry about money" part of the problem here? They have no sense of responsibility or the value of anything and therefore think a women's lib degree is worthwhile.

But, but, but not MY kids. Yes, your kids too.

AVmaster's picture

I got a 10k trust setup with them under special conditions.

They don't know they have it either, thats the trick...

3 daughters... wouldn't be able to pay for them all either...


I make them buy their own cars too and other shit too.

Dickweed Wang's picture

But my 69' charger . . .


Sweet!  But I still like the round tail lights on the '68 Charger better.

Aubiekong's picture

My kid graduated debt free no student loans but I believe I will be the one screwed when student loans are forgiven by the government.  I did with out when I should have borrowed like there was no tomorrow and used the money to have fun...

hotrod's picture

My kids 3 and I have also sacrificed a lot to get all educations paid for and loans finished.  We wonder all the time if we were Fools to be so responsible.

BidnessMan's picture

Yep - we will end up being the chump when the Jubilee is declared. But my kids are grateful to never have had a student loan balance hanging over their heads. Our deal was the wife and I went to well regarded state schools, we have several fine state universities with in-state tuition to choose from, not paying for a private college, and anything beyond a Batchelor degree is on them.

Vardaman's picture

PhD to do eldercare? PhD in bedpan emptying?

Winston Churchill's picture

Mines in somalian female mutilation, so I have that to fall back on if my engineering degree proves worthless.

GunnerySgtHartman's picture

Or we could just get the government out of the student loan business altogether.  Nearly half of all college students never finish - so stop subsidizing them and watch the price of college start coming down!

Chief Wonder Bread's picture

Student loans are a total scam which will eventually be paid for by the taxpayer (or the general U.S. public with a depreciated dollar)... (see professorconfess.blogspot.com to get the skinny on the student loan scam.

TheLastTrump's picture

I paid mine off in full a few years back. Was a great feeling. Took me about 13 years.

cowdiddly's picture

Exactly. Sudsidizing works the same as the Medical profession and the Housing bubble. Get the govt out of it and watch the campus enrollment evaporate and next year you will see a hatchet job on those tuition rates pronto.

My last daughter starts next year. She got a couple of scholarships that covered the tuition part but she will still need dorm fees and a meal plan. She can getr a part time job for her pocket money gas and essential items

I told her that I will buy her books and give her a credit card to eat (Its my duty to feed her anyway) and loan her the money for the housing @ 2% less than whatever the University will and she can pay me back when she gets to work. I won't allow here to EVER borrow money that cannot be discharged.

Im easing the pacifier out but there won't be no forbearance or loan forgiveness from Dad's Cowdiddly Ass National Bank.

Yea I talk tough. its my baby last one and she owns my heart and knows it, Ill prolly forgive the interest part but she will never know it to keep her little butt tightened up. lol

Dickweed Wang's picture

[I'll] loan her the money for the housing @ 2% less than whatever the University will and she can pay me back when she gets to work . . .


Yeah, sure she will . . .

Spungo's picture

I blame Starbucks. They need to pay their employees $20/h.

Hammer823's picture

Add to this the fact that millions of these students will have their loans "FORGIVEN" after either 10 or 20 years.  So the loans they take out that they couldn't afford will be paid back by the taxpayer.

I know a girl who took out over 60K in loans to get an MBA.  She is working for a non profit right now and paying a very small amount towards her loan based on the income based repayment plan.  The amount she pays doesn't even cover the interest.  If she works there 9 more years the entire 60K loan will be forgiven without her ever paying one cent towards the principle.


hotrod's picture

Yes that is the Government or non profit job plan.  10 years and it is GONE.  Well, absorbed by the tax payer.

SilverRoofer's picture

If they forgive these dumbshits loans I want my mortgage forgiven as well.

Their choice pay your fucking loans you dead beats 

Work in construction,or any other field to do it just because you got a bull shit degree isn't the responsibility of every tax payer in the US to cover you and your 4 years of partying it up going on spring break ECT.

Start taking responsibility for your own choices no one's fault but your own!.


cheech_wizard's picture

More STEM degrees, less bullshit degrees. It really is that simple.


Angry White Guy's picture

Wrong.  It's not that simple.  

DocBerg's picture

I see your STEM degree and raise you one H1-B.  STEM is hardly the path to riches any more with all the aliens coming into that market.

Dickweed Wang's picture

STEM is hardly the path to riches any more with all the aliens coming into that market.


Maybe, but you're a hell of a lot better off with a degree in engineering than social science or some other bullshit curriculum.