Tag Archives: student loan debt

Exploring solutions for student loan debt

The years following high school have always been a time of uncertainty for students choosing to pursue post-secondary education. The choices regarding college and choosing a major have big implications on a student’s career trajectory, not to mention financial situation, for years to come.

The growing uncertainty concerning the format of higher education due to COVID-19, the post-graduate job market, and the long-term impact of student debt leaves many individuals wondering if they will ever earn enough to free themselves from student loan debt.

This landscape presents significant opportunity for insurtechs and traditional insurance carriers to create sustainable solutions that capture a portion of the $1.54 trillion student loan market, while also providing students with post-graduation financial stability. Milliman’s Andrew Groth and Katherine Pipkorn explore some solutions to the student loan crisis in this article.

What lies ahead for borrowers grappling with student loan debt?

Over the past decade, student loan debt has increased 136%, and has maintained a higher level of serious delinquencies in recent years compared to other loan types such as credit card, mortgage, auto loan, and home equity revolving credit. Regulation has been created to provide support to student loan borrowers, and a better understanding of the Obama-era rules and the Trump administration’s proposals can provide some insight for what may lie ahead.

Student loans, which are at $1.4 trillion, account for 10.7% of overall household debt. Student loans are the second-largest consumer debt category, overtaking credit card debt and auto loans. A decade ago, student loan debt accounted for less than 5% of household debt.

Increases in the cost of secondary education and the long-term growth in enrollment explain the lion’s share of the triple-digit percentage jump in student loans over the past decade. Student loans are also a function of enrollment, which grew from 15.3 million students in 2000 to 20.8 million in 2010, a nearly 37% increase.

Rising levels of student debt are not nearly as important a question as delinquencies, which, though moderating somewhat, are elevated. In fact, starting in 2012 the delinquency rate for student loans topped those for auto, credit card, and mortgages. Over the past decade, the delinquency rate for student loans 90 or more days delinquent has climbed from 7.6% to 11.5% as of the third quarter of 2018, according to the Federal Reserve Bank of New York.

As alarming as this 11.5% rate of delinquency is, it could be an underestimate of the actual rate of delinquency. This is because about half of outstanding loans are currently in deferment, grace periods, or forbearance.

To read more about the bumpy ride ahead for student loans and regulation, read this article by Milliman’s Leighton Hunley and Katie Pipkorn.

Student loan debt at for-profit colleges

For-profit colleges attract students through innovative scheduling and online educational opportunities. However, 44% of defaults on federal loans come from students at for-profit colleges. In his latest Insight article, Milliman’s Leighton Hunley examines some of the possible causes of these for-profit defaults as he revisits the issue of student loan debt. The article also highlights student loan debt and delinquency trends.

For more analysis on this issue read Leighton and Jonathan Glowacki’s article “The student loan debt crisis in perspective.” The authors also offer some reform ideas in the article.

Student loan reform

Student loans have become a growing concern in recent months. With this in mind, Jonathan Glowacki and Leighton Hunley analyze today’s student loan environment and outline several reform ideas:

Loan issuers could improve their underwriting process by implementing risk management techniques similar to those in the mortgage and insurance industries. For example, loan issuers could limit cumulative exposure to certain borrowers such as those from for-profit schools, those with a history of poor academic performance, or those in two- and three-year degree programs.11 Issuers could also limit the amount of financing provided to higher risk borrowers and require them to fund a larger portion of their educations. Such reforms could improve the credit quality of student loans but may also have the unintended consequence of limiting the number of students receiving a higher education.

Similar to mortgage reforms, originators of government-funded or government-insured student debt could have “skin in the game.” This could help prevent lenders from providing oversized education loans to students with limited earnings potential. Other ideas being offered to improve the student loan market include debt forgiveness and relating the amount a borrower can repay in a given year to their earnings in that year. These solutions will lighten the debt burden for current borrowers but may not solve the long-term credit quality concerns going forward. The problem of providing credit to those whose who may not be able to repay the debt would still exist.

Reforms could also be implemented at the borrower level. For example, student loan borrowers should be educated to understand the potential consequences of financing their educations. Before taking out a loan, borrowers should be aware that student loan debt is not forgivable in bankruptcy. Borrowers who finance a large portion of their educations, e.g. above 70%, could be required to take a course in personal finance to help them budget their student loan debt upon repayment. Student loan borrowers should fully understand their options for repayment if they are unable to find a job after graduation.

Read more on their student loan reform ideas here.

Is the student loan debt crisis the next subprime mortgage crisis?

Some are speculating that student loan debt may create a debt crisis on par with the 2008 subprime crisis, but that point of view is inconsistent with how student loans have been traditionally funded. Milliman’s new paper entitled “The student loan debt crisis in perspective” offers some insight:

A large majority of funding for student loans is supported by the government through various initiatives and programs. For the 2011 calendar year, 95% of all new student loans were supported by the government (this is an increase from 2007 when nearly 75% of all new student loans were supported by the government) either through direct lending (e.g., the Federal Direct Student Loan Program) or government guarantees for credit and interest losses on the loans (e.g., the Federal Perkins Loan Program). On average, from 1995 through 2011, approximately 10% of student loan funding has been from the private sector and 90% of the funding has been from government programs.

The large portion of government funding for student loans means that the exposure of the private sector to student loan defaults is limited. This is in contrast to the mortgage market, where, over the past 20 years, approximately 50% of mortgage risk has been assumed by the private sector. During the build-up of the subprime crisis, the percent of mortgage risk assumed by the private sector was approximately 70%, with a significant portion of the risk being in “subprime” and second-lien mortgages. When these mortgages soured, the private sector absorbed the majority of the credit losses resulting in capital and liquidity strain for the large banks. If defaults on student loans increase, the majority of credit losses will be absorbed by the government.

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