College Students Pile up Huge New Debt but Applications for New Loans Are Slowing

Friday, February 21, 2014

Like most states, California has experienced a steady decline in all kinds of household debt—and, correspondingly, a decrease in loan defaults—out of necessity and prudence since the since the early days of the Great Recession in the first quarter of 2008, except in one area.

Student debt problems continue to escalate, but the end may be in sight.

According to the U.S. Department of Education, there were 2,447,623 applications for federal financial aid from California students in 2013, a 78% increase since 2006. But those Free Application for Federal Student Aid (FAFSA) requests are 23,634 fewer than the year before.

Only 1,376,017 FAFSA applications were filed in 2006. That grew by 54,736 in 2007. The number spiked in 2008 by 198,812 and skyrocketed 318,894 in 2009. Applications busted through the 2 million mark in 2010 when an additional 262,637 applications were received for federal aid and another 206,608 in 2011.

The number grew just 53,553 in 2012 before dipping last year.

College tuition and fees rose steadily during the time period as families continued to be squeezed by high unemployment and low wages. The data from the Department of Education looked at by the Bee showed the percentage of University of California (UC) and California State University (CSU) freshmen receiving financial aid increased from 57% in 2006-07 to 72% in 2011-12.   

Nationally, delinquencies from debt incurred through credit cards, mortgages, auto loans and home equity revolving accounts have all plummeted in recent years, according to data from the Federal Reserve Bank of New York. But student loan delinquencies continue to rise dramatically. Nearly a decade of defaults, refinancing and retrenching has stabilized debt accumulation, but hasn’t made that kind of impression on student loan borrowers. Around 9% of the nation’s $11.5-trillion-dollar household debt is student loans; 70% are mortgages.

While it is unlikely that a rise in student debt would be received as good news, the same is not true of other forms of household red ink. The Los Angeles Times welcomed as good news that for the first time since the Great Recession started that there was a quarterly uptick in debt. It was interpreted as a sign of confidence in the economy by consumers.

“They're starting to buy homes and cars again,” Gary Thayer, an economist at Wells Fargo Advisors in St. Louis, told the Times. “These are good things for the economy.”

Whether consumers can pay for those things may prove to be another matter. What is certain is that the $53 billion in new student loan debt in the fourth quarter won’t buoy anyone’s spirits. Students owe $1.1 trillion. 

Student indebtedness can be a combination of local, state and federal loans. The federal figures don’t give a context to the raw number of FAFSA applications, failing to note the approval rate and amounts of the loans granted.

But it’s safe to assume that this generation of students and the next will be saddled with staggering debt loads early in life as they struggle to enter a miserable job market amid increasing income inequality.

–Ken Broder


To Learn More:

Spike in California Students Seeking Financial Aid for College (by Loretta Kalb, Sacramento Bee)

We Are Living in Boom Times for Debt Collectors (by Kevin Drum, Mother Jones)

Quarterly Report on Household Debt and Credit (Federal Reserve Bank of New York)

Default Rates Continue to Rise for Federal Student Loans (U.S. Department of Education)

Household Debt Rises at Fastest Pace Since Global Financial Crisis (by Walter Hamilton, Los Angeles Times)

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