College finance 101: Not all their (de)fault? | BrainerdDispatch.com | Brainerd, Minnesota

College finance 101: Not all their (de)fault?

Posted: May 1, 2012 - 6:15pm

That headline was in the fedgazette, the newspaper published by the Ninth District of the Federal Reserve Bank of Minneapolis in its April edition.

Its subhead is “Student default rates are rising and likely to continue until the economy sees strong job growth.”

Well, according to Ronald A. Wirtz, the editor of the fedgazette, that may be a while. “Myriad factors influence student loan defaults in the short and long term,” Wirtz reported. “Two of the biggest causes behind the recent spike in defaults are the rapidly rising student debt and a tough job market for graduates since the recession.”

Where is most of the student debt in the ninth district? Two year public institutions, such as community colleges and technical schools. ”For example, among 68 two-year public community and technical colleges in district states, only three saw default rates improve from 2007 to 2009.

So where’s the pinch? Millions of graduates are unable to find jobs. That impacts those able to make efforts to pay off debt. Thus, the defaults. There is another factor. In the early days of corporate downsizing, many companies forced the remaining employees to take pay cuts. Some were significant. Those employees who had college loans were among those who defaulted.

“Of course, higher debt would be manageable if wages (stagflation) for new graduates were increasing as well,” Wirtz said, “But adding insult to a tough job search are stagnant wages for newly minted grads fortunate enough to find a jobs.”
Minnesota high school graduates attending state institutions increased their borrowing of money to pay for school 39 percent over two years, some $1.54 billion. Nationally, the total student loan amounts to nearly $1 trillion.

Does anyone smell a bailout coming?

—Keith Hansen