Comparing the Default Numbers on Subprime Mortgages and For-Profit College Loans

News from the Department of Education:

The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools.

Kevin Carey explains that the number is even worse than it looks.  A 15% default rate for for-profit schools in the first two years!  Let’s put that in perspective.

Let’s take a graph from the Federal Reserve Bank of Chicago’s September 2010 report Default Rates on Prime and Subprime Mortgages: Differences & Similarities.  This graph is the default rate per month from origination, showing the default rate X months out from when the loan started.  You can see it get worse as the years go on, showing increasing trouble and fraud in the private-label securitization pipeline:

We know from the report today that the “FY 2009 cohort consisting of borrowers whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010.” So that’s a 15% default rate for for-profit schools on an time since origination that goes from 12 months to 24 months. I’m going to add that line into the Chicago Fed’s graphic for the 2009 cohort, along with one for the 11.6% of the 2008 cohort:

It’s not subprime at its worst, but it is getting closer. Plus this data is delayed a year; the past year has been terrible for the job market, young graduates in particular, and it will likely increase again just as it has done for this recent cohort.

Indeed the employment-population ratio for 20-24 year olds with a college degree didn’t go up in 2010.  As we put this graph and argument together back here, even young people with a college degree are getting hit in this recession and have a depressed level of workforce participation:

So much for just sending everyone to college as a response to this recession.

For fun: you can also get total default rates broken down by state from the government here.  Just to check, I took those rates and scatterplotted them against U3 unemployment rates by state for March 2010 and found a correlation:

Why don’t we mass refinance student loans in the same way there is talk about doing a mass refinancing of houses?  Like housing refis, there are significant advantages.  We certainly could use some more channels for monetary policy to run through, as rates are at record lows.  People struggling to make their student loan payments are in places where there is a lot of unemployment, so it is well targeted.  And most crucial is that a refinancing of this would be felt by the person as a permanent increase in income; as such they’d have a high propensity to spend it, which is the best kind of stimulus.

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3 Responses to Comparing the Default Numbers on Subprime Mortgages and For-Profit College Loans

  1. Ken Houghton says:

    Not that it matters much, but I cannot foot the percentages shown in those state rates with the data. (31 cases where rounding to the third decimal place would produce a 0.1% increase isn’t much, but it seems strange, and makes me uncertain that all the defaults are included in “entered repayment.”

  2. Pingback: Higher Ed Marketing News Round-Up | The CUnet Blog

  3. Pingback: Forgiving Student Loan Debt: The Stimulus Nobody’s Talking About

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