American students greeted the recently started academic year with a record loan of almost $ 1 trillion. In the United States, the thirst for knowledge turned out to be stronger than the desire to have a car. The share of student loans exceeded the share of auto loans – 30% against 24.6% – in the total volume of consumer lending (excluding mortgages). The rate of overdue loans also increased.
Growing demand for getting higher education
Over 10 years since the beginning of 2003, the amount of loans for education in the United States has almost quadrupled, reaching $ 994 billion, follows from the latest survey of the Federal Reserve Bank of New York. All this time, the volume of loans has been increasing every quarter. But during 5 years before the 2008 crisis, all consumer loans were growing: secured by residential real estate (+ 174%), education (+ 140%), cars (+ 26%), credit cards (+ 22%). The same mortgage added 87%. After the collapse of financial markets, all loans except student loans have dropped significantly. On the contrary, their sum from 2008 to 2013 increased by 70%. Only recently have auto loans reached the pre-crisis level, in addition to student loans.
The problems with student loans
Despite the fact that the amounts of mortgage and student loans are incomparable – $ 13 trillion versus $ 1 trillion (data from the Federal Reserve and the Federal Reserve Bank of New York), the question arises: will a new bubble inflate?
Publicly, this topic was first raised by the Federal Advisory Council, which makes recommendations to the Fed (it includes 12 representatives of the US banking industry). After meeting on February 3, 2012 with the Fed governors, the board devoted a separate chapter in its report to the risks associated with student loans: the number of students is increasing (by 2011 there were 26 million people; 5% annual growth over five years), training becomes more expensive (in 9 years the price has doubled), in terms of the share of overdue debt, this type of loans has caught up even with credit cards, the level of requirements for the borrower is relatively low – a loan is issued without confirmation of income and assets (which refers to a high-risk mortgage).
The record amount of student loans does not put the financial system in jeopardy, similar to the mortgage crisis, because most of the loans for education are not issued by banks, but by the state.
Nevertheless, the situation around student loans was discussed at a meeting of the Federal Reserve Committee on open markets in March this year. Some committee members expressed concern about the risks they pose for the economy in general and for households in particular.
Student loan = a mortgage
Owning a home and a higher education is the same american dream that the US authorities have always tried to make more accessible including by artificially stimulating demand from people with low incomes. What this can lead to, we saw in the case of low-quality mortgages during the last crisis.
As in the case of mortgages, the quasi-state corporation Sallie Mae (analogous to Fannie Mae and Freddie Mac mortgages) was established in the student loan market. It created liquidity in the student loan-backed securities market without direct lending. Sallie Mae was later privatized and is now the largest private lender in the market.
Plus, educational loans (as well as high-risk mortgages) do not have effective methods for checking the quality of borrowers: lack of credit history, work experience, etc. But the reasons, however, are different: educational loans do not have these characteristics due to the young age of the borrower , which a priori does not imply a very high risk of this loan.
As in the case of high-risk mortgages, the state achieved the growth of student loans without significant use of budgetary funds. As a result, the volumes of educational loans and high-risk mortgages became comparable. And the share of overdue (90 days or more) on student loans already exceeds the same indicator for the most risky segment of consumer lending – credit cards and at the end of the second quarter of 2013 is 10.9%.