Problems in The Student Loan Market

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Moody Analytics released a study that raises concerns about the growing student debt problem and the outlook for future lending. Student debt, unlike other debt which has declined, has been growing during the recession. The growth is driven by enrollments which have increased by 300% over the last 40 years, and by prices which have increased faster than inflation. Price increases have been fueled by lower public support at state colleges, and lower endowment supported subsidies available at private colleges. For-profit colleges have also increased enrollments by over 300% in the last decade. They have lower graduation rates than other colleges and their graduates have been less successful at obtaining jobs. The 15% youth unemployment rate in the US also increases the burden of recent graduates who leave college with an average debt burden of $27,000.

The outlook for future lending also raises concerns. The Budget Control Act of 2011 will require that interest charges will accrue to graduate students while they are attending college. That will expand the amount of average debt at graduation by 16%.
There may be further cuts to student loan subsidies as cuts to discretionary spending are targeted in the next round of deficit reduction negotiations.

The issues raised in this report may impact the economy by curtailing the growth in spending on education and by lowering the productivity of the workforce as fewer students are prepared for the jobs of the future which will require higher education.