Industry Study

Industry Study


2019 Student Loan Industry Study

You can’t put a price on education, which is a good thing because the sticker shock would put us off it altogether.

This comprehensive student loan industry study investigates multiple data sources to reveal the key trends and statistics that define how we finance higher education.

Student loans are the fastest-growing source of debt for U.S. households. Since 2007 it has grown three times faster than auto loans and 150 times more than mortgages. Student loans are now the largest source of unsecured debt in the United States and have become a financial industry in their own right. Complete with its own secondary market and student loan asset-backed securities.

The average student pays about $24,000 a year (around $96,000 for four years) to go to college. Most households cannot afford to pay that with savings, which is why student loan balances are growing at an unprecedented rate. More than half of families (53%) needed loans to pay children’s undergraduate education and 66% applied for scholarships.

What is a student loan?

A student loan is money that private institutions or the federal government lend to students or their parents to finance post-secondary education. Most students, about 70% of students who get a bachelor’s degree, finance their education with one or more student loans (source). The majority of student loans—nine out of ten—are provided by the federal government.

What is the difference between a student loan and a personal loan?

Both student loans and personal loans are unsecured. This means they do not require borrowers to provide collateral, such as a house or a car, to guarantee the loan. Student loans usually have lower rates than personal loans. In 2018, private student loans, start with rates as low as 3.75% APR and go as high as 16% APR. Personal loan offers, on the other hand, start at 6% APR for people with excellent credit and can go into the triple digits. Another benefit of student loans is that the interest you pay is tax deductible up to a maximum of $2,500 (source). The catch is that student loans come with certain restrictions.

First, they can only be used to cover tuition, college fees, room and board, living expenses while at college, and books. Second, the funds from a student loan are usually disbursed directly to the college’s financial aid office. Not all educational institutions can accept student loans. For example, if you are trying to finance a coding bootcamp, you may need a personal loan. Once tuition fees are paid, you can claim the remaining funds to pay for other expenses. Another important difference is how student loans are handled if you file for bankruptcy. Personal loans are discharged through bankruptcy as a matter of course. Requests to discharge private and federal student loans are usually denied. Borrowers have to appeal the decision and prove why repaying the student loans would place an undue hardship on them.

What is the size of America’s student loan industry

Student loans are the largest source of debt in the United States after mortgages ($10.1 trillion). If our student loan balance were a national budget, it would be the fifth largest in the World, after the U.S. ($3.99 trillion), China ($3.104 trillion), Japan ($1.90 trillion), and Germany ($1.57 trillion).

What is the total student loan debt in the United States?

As of July 2019, Americans owed $1.61 trillion in student loans and the debt it’s only getting bigger. At the current rate, Americans will owe $2 trillion in student loans by 2023 or even sooner depending on the forecast method you use.

However, the $1.61 trillion estimate does not include the money parents and students borrow from their credit cards, home equity lines of credit, or their retirement funds. According to Sallie Mae’s annual survey on 800 parents and 800 students, about 5% of college costs are financed by other forms of debt. This includes home equity lines of credit (1%), credit cards (1%), and other loans (3%). Withdrawals from retirement savings cover an additional 1% of college costs (source).

House prices and student loans

Home equity is not a major source of funding for students. However, many families use their home equity as a safety net to finance college expenses. The same Sallie Mae survey has 8% of parents as “extremely worried” about the effect a decrease in their home value would have on their ability to pay for college. A recent report by the Federal Deposit Insurance Corporation estimates that the 30% drop in house prices of 2006 resulted in the average student having to borrow $1,300 more with student loans. Consistent with this hypothesis, Sallie Mae reported a 7% drop in the share of college costs paid by student families when you compare the periods 2003-2007 and 2007-2012 (source).

How much debt does the average college graduate have?

“Only” 27% of college costs are covered by student loans—19% covered by student borrowing and 8% by parent borrowing (source). And yet, the average graduate leaves college with a debt load of $30,301 according to the latest data by the National Center for Education Statistics.

Of course, not all students get a bachelor’s degree. In fact, in 2016-2017, 56.9% of students were working toward a bachelor’s degree. Costs vary dramatically depending on the institutions and the type of degree.

The state of the student loan market in 2019

The latest data we have for combined private and federal student loans are from July 2018 (Consumer Financial Protection Bureau). In that month there were 917,007 student loan originations ($16.6 billion), which represents a 48% year-over-year increase.

However, to get a feel of the overall student loan market it helps to get a little more granular. The following graphs show the growth of new student loans by month, based on age, credit type, income, and location. They include both federal and private lenders.

Since 2013, both debt volume and the number of originations have grown, but debt volume has increased at a much faster rate.

How many student loan originations were there in 2019?

We only have data for the first month of 2019, but the latest data published by the CFPB Consumer Credit Panel shows a significant spike in new loan originations. There were 2,016,002 loan originations in January. This is the fastest growth in new loan origination since 2008.

Which age groups take on the most student debt?

Since August 2015, borrowers with ages between 30 and 45 borrow the most. Borrowers under 30 took on more debt than people between 45 and 64, but by only a small margin. These figures are no doubt influenced by an increase in the number of people going back to school later on in life and the high cost of graduate degrees. It also reflects how much student debt parents borrow on behalf of their children.

Which credit score profiles borrow the most?

Superprime has the highest volume of student loan originations ($5.76 billion) but deep subprime is second with $3.95 billion in new loan originations. The high percentage of student debt in the hand of borrowers with bad credit is counterintuitive. It reflects that most student loans are subsidized by taxpayers and offered based on what students need not what they can afford to pay back. Also, most students, even those from middle-income families, often have little to no credit—particularly in the first years of college.

Which income brackets borrow the most?

High ($6.49 billion) and middle-income ($6.13 billion) households borrow twice as much as moderate-income households ($3.05 billion) and nine times what low-income families borrow.

Which states have seen the largest growth in student loan originations?

Growth (and decline) in new originations varies dramatically by state. Alaska (195%), North Dakota(123%), and Nevada (88%) saw the largest growth in new originations. Connecticut (-65%), Hawai (-68%), and South Dakota (-77%) experienced the largest declines in new originations.

What percentage of student loans are funded by the federal government?

The Department of Education is one of the biggest banks in the country. The student loans issued by all other banks combined don’t amount to 10% of what the Department of Education has on its books.

This is a new development. Up until July 2010, the government paid billions of dollars to banks and nonprofit agencies to lend money to students. The Student Aid and Fiscal Responsibility Act of 2009 changed all that.

The new legislation included a switch to 100% direct lending. Overnight, the Department of Education became the largest student loan lender in the country. The Department of Education doesn’t directly service these loans. It still employs financial institutions to answer the phone, send balance statements, and collect debts, but it is the direct lender of more than 44 million borrowers (source). Yes, that is not a typo. Ten percent of consumers have student loan debt.

How much does the government lend in federal loans?

In 2017, approximately 91.8% of student loans were federal ($1,386 billions) while only 8.2% ($113.2 billion) were private student loans.

What are the federal student loan rates?

How much do federal student loans cost the taxpayer?

Initially, the government projected a profit of $135 billion on student loans over 10 years, not counting $35 billion in administrative costs (source). However, this accounting method ignored the market risk the government takes. If you used the fair-value accounting method, which does take into account market risk (and opportunity cost), federal student loans cost the taxpayer $88 billion. Another way of looking at it is that the FCRA shows a profit margin of 12%, whereas fair-value shows a subsidy rate of 8% (source).

However, the latest financial reports from the department of education are not encouraging. The 2018 Department of Education financial report projected a shortfall of $64.6 billion to cover outstanding debt and accrued interest of the Credit Programs for Higher Education. In 2017, the projected shortfall was $36.15 billion (source).

The change from a $135 billion profit to a $64.6 billion negative balance is mainly due to a sharp increase in the number of borrowers participating in income-driven repayment plans. The number of borrowers enrolled in income-driven repayment plans has more than doubled since 2014.

Are federal student loans good for America?

Depending on who you ask, federally subsidized loans are either a way to level the playing field and give everyone a shot at the American dream or a failed social experiment that has subsidized an unprecedented rise in tuition costs.

The two most popular arguments in favor of federal loans are college enrollment rates and access to better job opportunities and wages. Sure, education may be expensive, so the argument goes, but it ultimately pays for itself.

More lower-income students are enrolling in college than ever before

First, it is true that now lower- and middle-income students attend college more than ever before. According to the latest figures available from the National Center for Education Statistics, 70% of high school graduates enroll in college. In 2016, that meant 2.2 million of the 3.1 million high school completers went to college.

The gap in enrollment rates between low- and high-income students went from 30 percentage points in 2000 to only 16 percentage points in 2016. In 2015, the ratio of low-income students that attended college surpassed middle-income students.

College graduates make 82% more than workers without a degree

Second, there is no arguing that college graduates as a group have a lower unemployment rate and higher wages. In 2018, unemployment rates were double for people with only a high school diploma (4%) compared to those who had a bachelor’s degree and higher (2%).

Higher wages are another clear benefit of a college education. College graduates make 82% more than workers who don’t have a degree.

Correlation does not mean causation

However, it is important to remember that correlation doesn’t imply causation. There is no doubt education is related to wealth but it’s not clear how. To illustrate, people who go to college are more likely to have parents who went to college. But attending college had no influence on their parent’s education. Instead, people who can afford to attend college are more likely to have better-educated parents with higher wages.

Also, although it is true that going to college will, on average, increase your wages, the benefits are inconsistent. A white person with college-educated parents will receive an 8% net worth increase by going to college. But a white person with parents that didn’t go to college will receive a 17% boost to her net worth. A nonwhite student, on the other hand, will get a 25% boost from her college education if she has parents with a college education and went to college (source). Clearly, there is more than one factor at play here.

Similarly, it takes ambition, drive, and some intelligence to graduate. You would expect a group of ambitious, driven, and talented people to do better than the average population regardless of what academic training they received. Those same people could have started small businesses, attended coding bootcamps, or enrolled in apprenticeship programs and become financially successful without investing more than $80,000 and the opportunity cost of four years of reduced or no income. That is quite the investment. To put it in context, if a 25-year old invested $80,000 in a retirement fund and never made another contribution, she would have $1,118,000 by the time she retired. This is assuming a mediocre 7% rate of return. Sadly, the increase in college enrollment has not resulted in higher wages for workers.

College enrollment may have improved but wages have not

The percentage of employees with a college degree has increased dramatically. However, that hasn’t translated into better wages among workers. Student debt has increased from $200 billion to $1.6 trillion. Median student debt has increased from $10,000 to $20,000 but the wages of graduates have remained stagnant or dropped (source).

Considering the spectacular rise in educational attainment, you would expect a significant improvement when access to a college education and marketable skills improved. However, the median worker brings home a dollar less a week in 2017 than in 2001. The median weekly earnings (adjusted to 1982-1984 dollars) for workers 25 years and older has dropped from $407 in 2001 to $406 in 2017.

Who carries the burden of student loan debt?

Parents pay 44% of their children’s college expenses. On average, students pay 27% of their college costs when you include income and savings (13%) and student borrowing (14%). About a third is paid from scholarships

The cost of education, student debt, and delinquency

Of course, student debt is not in itself a bad thing. The cost of education has increased by 50% in the last 30 years. But the lifetime earnings for those with a degree have also increased by 75% (source).

Investing in a good education is still a sound financial decision for many. In fact, there is an inverse relationship between the level of education of a borrower and the chances of defaulting on the loan. In other words, the more students borrow toward education, the less likely they are to default.

Nevertheless, repaying student debt is a struggle for many. According to the Federal Reserve, 20% of borrowers were behind in their student loan payments in 2017.

Sadly, the most vulnerable student loan borrowers with the lowest debt balances are the most likely to default on their loans. According to a 2016 study by the White House, loans of less than $10,000 accounted for nearly two-thirds of all defaults (source). Similarly, in 2018, 70% of the borrowers who were more than 360 days delinquent on their loans had balances of $20,000 or less (source).

Student loan refinancing

The growth of student loan debt has created a market for a host of new student loan refinancing companies, such as SoFi, LendKey, and CommonBond. These companies help students save money on interest payment by refinancing their private and federal student loans.

What is the size of the student loan refinance market?

SuperMoney estimates the size of the student loan refinance market in 2018 at $285.6 billion — $202.9 billion in federal loans and $82.7 billion in private loans.

This figure is based on a 2015 study by Goldman Sachs analysts. The report estimated 25% of the federal direct and FFEL loans and 70% of private student loans could be eligible for refinancing based on their credit quality. Low credit quality borrowers are unlikely to qualify for a lower rate with a market-based lender. Apply the same ratios to the latest numbers from the Department of Education ($811.5 billion) and MeasureOne’s 2018 report on private student loans ($118.2 billion) and you arrive at $285.6 billion.

History of student loans

Student loan balances may have grown exponentially in the last decade but they are nothing new. If you look back in history, financial aid of some kind, whether as loans, scholarships, grants, or philanthropic programs, has always been part of higher education.

College student loans date back to medieval universities, which recognized three main sources of financial support, student-paid fees, church donations, and state contributions. The University of Bologna—the oldest continually running university to grant degrees throughout its history—is a good example of how student aid started.

“In-state” tuition subsidies

History of student loans
A class in the University of Bologna, c 1350.

Back in the 1100s, the University of Bologna was a magnet for students and intellectuals from all over Europe. Such was the popularity, Bologna professors felt the need to create rules aimed at reducing the number of foreign students.

Similarly, state-sponsored colleges charge higher fees to out-of-state students, which subsidizes the tuition of in-state students.

Alumni-sponsored programs

One of the rules the University of Bologna developed was that foreign students were responsible for any debts generated by their countrymen. For instance, French students were responsible for the previous debts of French students; English students had to take care of their countrymen’s tab and so on. Eventually, students organized by country of origin and pooled their resources in loan chests managed by senior students. With time, the governments of foreign students got involved and started financing the education and living expenses of needy students (source).

Similarly, SoFi and CommonBond—two of leading student loan refinance lenders in the United States—started out as a source of affordable refinance loans for Stanford and Wharton students. Initially, the funding was provided by the pooling of resources from of the alumni of their respective colleges.

Philanthropic programs

In the past, wealthy patrons gave private student loans and grants to students who would sometimes repay them with prayers and acts of charity on their behalf. Grants are still an important segment of education financing. In 2018, scholarships and grants funded 28% of college costs.

Donations from wealthy colonists played an important in financing education for lower-income students in Colonial America. Harvard, for instance, was founded when John Harvard left half his fortune to New College (later known as Harvard).

Harvard’s first scholarship program was started by Lady Anne Radcliffe who donated £100 and asked the interest from her donation be used to aid poor students. This became a trend with philanthropists creating scholarship and financial aid programs for Yale, Princeton, William and Mary, and the University of Pennsylvania (source).

Today this pattern continues. 55% of Harvard students receive a scholarship. Successful alumni often support their alma maters with generous donations. Robert Woodruff, the former CEO of Coca-Cola, donated more than $230 million to Emory University. Sanford Weill, of Citigroup, donated $247 million to Cornell University.

Scholarships are a valuable resource for financing college expenses. About a third of college costs are covered by scholarships and grants. If you are going to college and you want to use your education to help people reach their financial goals, check out SuperMoney’s Financial Literacy scholarship program. It awards $2,500 a year to a student who wants to help Americans improve their financial wellness through continued education.

Zero-percent student loans

In 1838, Harvard started the Harvard Loan Program and became the first private student lending company. It offered zero-interest loans to students with aptitude who couldn’t afford tuition. This loan model spread to other prestigious colleges. Nevertheless, philanthropic donations still funded these programs.

Today, 0% interest student loans are still available. Typically, state education departments, foundations, associations, and charitable trusts offer them. For instance, you have the Massachusetts No Interest Loan Program (NIL), The Bill Raskob Foundation, The Scholarship Foundation of St. Louis, and the Jewish Free Loan Association (JFLA)— which is open to students of all faiths in the Los Angeles area—to mention a few.

The GI Bill

You can track the beginning of our current model of government-funded financial aid to the Servicemen’s Readjustment Act of 1944 (aka G.I Bill). Within 10 years (1944-1955) college enrollment doubled from 1.15 million to 2.45 million (source). The education side of the GI Bill offered grants—not loans. However, it’s housing loan program did offer a model that could be applied offer financial aid on a larger scale.

The Higher Education Act

The Higher Education Act of 1965 was another watershed moment in the history of education financial aid. It made higher education an issue of national interest and provided funding for a guaranteed loans program. And colleges that received funding now had to adhere to report data and follow recognized accreditation standards.

Some of the programs we now have, such as the Stafford and Grant loan programs began when the Higher Education Act was reauthorized in 1972. Subsequent reauthorizations of the Act also introduced funding for grants that did not require repayments, such as the Basic Educational Opportunity Grants Program.

Loan forgiveness programs

The “success” of student loans as financial aid and the increase in tuition costs caused many borrowers to overextend themselves. Now the discourse has switched to how to help students get from under overwhelming levels of student debt. The Student Loan Forgiveness Act of 2012, for instance, proposed a way out for borrowers who made 120 payments during the first 10 years of their loan. It also put a cap on federal student loan interest rates. However, this Act does not enjoy bipartisan support and is unlikely to pass in its current form. Student loan forgiveness programs remain a popular but controversial issue that will define much of the political dialogue for years to come.

The future of the student loan industry

If there’s one thing about the student loan industry everybody can agree on is that it’s not sustainable in its current form. So, change is certainly on the horizon for student loans. What that change will look like is hard to say. Here are some areas where you can expect significant shifts.

Student loan forgiveness programs remain a popular but controversial issue that will define much of the political dialogue for years to come.

Legislation

There are several law proposals working their way through Congress. It’s hard to say which ones will survive in the current political atmosphere but here are some worth keeping tabs on.

  • Reauthorization of the Higher Education Act. This is the main law that regulates higher education, including student loans. Congress has to reauthorize it every five years for the programs to continue.
  • Student Loan Relief Act of 2017. A proposal to reduce interest rate caps for federal student loans. It also eliminates origination fees and offers to refinance loans for direct student loans and federal family education loans.
  • REDI Act. If it passes, it would provide interest-free deferment on federal student loans for physicians with medical school debt during the time they are in a residency program.
  • Private Student Loan Bankruptcy Fairness Act. This law would modify Title 11 of the United States Code so student loans are dischargeable in a bankruptcy.
  • Parent PLUS Improvement Act. The idea is to reduce the interest rates of Parent Plus loans and make them eligible for income-based repayment plans.
  • Employer-Sponsored Student Loan Repayment Plans. There are several law proposals for giving employers incentives for helping workers reduce their student debt.
  • Strengthening Communities Act. Proposes a new partnership with the states that waives community college tuition and fees for eligible students.

Higher interest rates

The Federal Reserve has announced it will continue its pattern of gradual rate increases. This trickles down to all types of credit, including student loans, so expect higher interest rates for private student loans and refinancing loans if you have a variable interest rate. Congress sets federal student loan rates every July 1st. But they will also rise if the trend continues.

The growth of privately funded student loan refinancing, potential changes in the federal student loan programs, and new types of student lending—such as income share agreements—could transform the industry.

The end of student loan forgiveness

Currently, borrowers can apply for student debt forgiveness through multiple programs, such as the Public Service Loan Forgiveness (PSLF), Teach Loan Forgiveness, Perkins Loan Cancellation, Disability Discharge, and Closed School Discharge. However, qualifying for these programs is often easier said than done. According to the latest data from the U.S. Department of Education, 99% of applications for PSLF are denied. More than half (55%) of them were rejected because of issues with qualifying payments. Only borrowers who are enrolled in an income-driven federal student loan repayment plan can apply for PSLF. If you’re considering applying for PSLF, remember that only federal student loans are eligible for public service loan forgiveness. You must also make a majority of the 120 required payments while enrolled in a federal student loan repayment plan to qualify.

Privatization of student loans

President Trump feels the federal government makes too much money from student loans and has suggested private lenders get a bigger piece of the action. The Federal government seems to be losing money on student loans so this may not be a bad idea for taxpayers. It would also increase the choices available, which may encourage lower rates and better benefits. Of course, this would hurt people who don’t qualify for private student loans and require a need-based student loan program.

Income share agreements

An Income Share Agreement (ISA) is a financial structure where the lender offers a lump sum in exchange for a percentage of the borrower’s future income. ISAs are to individuals what equity investment is to businesses. If you believe a business is going to succeed, you don’t give them a loan. You buy shares. Instead of lending to students, ISA asks for a share of their future earnings.

It is still an exotic source of credit with only a few lenders in business. In 2014, they got some attention when bill proposals that gave them the same legal standing as student loans were introduced into Congress. One lender, Upstart, marketed them for a while. The bills were never enacted and interest in ISAs fizzled.

Now they are back and people are listening because universities are also getting involved. it is growing and includes some big names in education. The idea first started in the 1950s with the economist Milton Friedman but it never caught traction. The recent spike in student loan defaults caused lenders and colleges to get creative. In 2016, Purdue University started its ISA tuition option as an alternative to students and parents who would otherwise resort to high-interest private student loans. Other colleges, including the United States Collegiate Athletic Association—which has 80 member schools—also offer similar programs. Private for-profit companies that also offer ISAs include Align, GS2, Lumni, and 13th Avenue Funding.

The bottom line

The transformation of the federal student loan program from a loan guarantee model to a direct lender pushed private lenders to the fringes of the student loan market. Default rates are increasing and student debt is crushing the financial hopes of millions. The growth of privately funded student loan refinancing, potential changes in the federal student loan programs, and new types of student lending—such as income share agreements—could transform the industry.