US university students and graduates are facing a double whammy of ballooning debt loads and high unemployment, raising worries that a potential delinquency crisis could bleed into the wider economy. Student debt has increased nearly sevenfold from $80bn in 1999 to $550bn at the end of June 2011, according to the Federal Reserve Bank of New York. Other estimates from the Department of Education put outstanding student loans as high as $805bn.
But the unemployment rate for 20- to 24-year-olds is nearly 15 per cent - higher than the overall 9.1 per cent rate - compromising the ability of graduates to pay off their growing debts. Student loan delinquencies have risen from 6.5 per cent in 2003 to 11.2 per cent in June 2011, nearly as high as the 12.2 per cent rate on credit cards.
"The long-run outlook for student lending and borrowers remains worrisome," Moody's, the rating agency, said in a recent report. "Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the broader economy."
In the first half of 2011 student loans were the only category of lending where the delinquency rate rose.
As state budget cuts have driven many public universities to raise tuition fees, students are bearing a larger share of their educational expenses.
Alberto Gutierrez, a 38-year-old doctoral student at the University of California, Los Angeles, has had to borrow more money and take on a part-time job to cover his expenses, including a $3,000 monthly mortgage payment. He receives some financial aid, but not as much as he had hoped. "It's a public university so they've been cut a lot. Resources are pretty slim," he said.
To tide him over, Mr Gutierrez borrowed another $10,000. "I'm going to be about $25,000 in debt when I finish. I've never owed that much money."
Some observers have compared the potential impact of a steep rise in student loan delinquencies to the subprime housing crisis, in which a rise in defaults cascaded into the wider economy. The criteria for federally guaranteed student loans are not as stringent as for other kinds of debt, and many loans have been securitised and sold off to investors.
The rise of the for-profit college industry, where enrolment has grown 10 times faster than for public and non-profit universities in the past decade, is causing particular alarm: default rates among students at for-profit colleges are significantly higher. A report from the US Government Accountability Office last year found that some for-profit schools "encouraged fraudulent practices" when advising students to apply for federal financial aid.
But even though the total level of outstanding student debt is projected to reach $1,000bn in the near future, according to the Department of Education, it is still considerably smaller than the estimated $2,500bn in risky subprime loans.
While homeowners can default on their mortgages, students cannot walk away from their loans. The wages of student loan borrowers can be garnished and the debts cannot be included in a bankruptcy filing, except in cases of undue hardship.
"I don't think it's a subprime crisis in the making," said Mark Zandi, chief economist at Moody's Analytics. But he added there would be higher delinquency and loss rates on loans as graduates faced a difficult economic environment. "Student loans have historically had credit issues and it's going to get worse."
Activists, including the liberal website Moveon.org, have called for the government and lenders to forgive student debt.
That proposal is winning the backing of the Occupy Wall Street protesters who are demonstrating against the perceived excesses of the financial sector.
Ani Monteleone, who graduated from the Oregon College of Art and Craft in 2006, carried a sign calling for student debt relief at an October 5 march on Wall Street. She said monthly loan payments were a burden for graduates who were already struggling to pay their
bills and find a job. "They bailed out the banks. Why can't they bail out the people?" she asked.
Some analysts say such a plan would bail out the wrong people. "It's not about creating a fairer income distribution," said Justin Wolfers, at the University of Pennsylvania's Wharton business school. "It's actually high school dropouts who are doing badly, not necessarily university graduates."
Mr Gutierrez is not waiting for such a bail-out. He wants to stay in higher education when he finishes his degree, but finding work will be hard. He accepts he could go into delinquency.
"In California, there's no university hiring, I will have to relocate and even then most are hiring for non-tenure track positions," he said. "I'm looking to end up with a temporary lecturer position, which I'll have to juggle with other part-time work."
This piece was first published in the Financial Times.