Copyright © Edvisors Network, Inc. () The Future of Student Lending and Financial Aid Mark Kantrowitz, Senior VP and Publisher, Edvisors.com

Copyright © Edvisors Network, Inc. (www.edvisors.com)

The Future of Student Lending and Financial Aid

Mark Kantrowitz, Senior VP and Publisher, Edvisors.com

Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 2Copyright © Edvisors Network, Inc. (www.edvisors.com) 2

Roller Coaster Ride?


The Hairball?


A Mouse Trap?


Predicting the Future

Use past trends to model future events– To predict tomorrow’s weather, look out the window today– Student loan debt has been growing steadily

When it rains, it pours Monitor for unforeseen events and other exceptions

– Credit card debt turned a corner in September 2008

Policy development is cyclical– Past is prologue– Fixed/variable interest rate formulas are not a new idea– Other old ideas may be resurrected

Historical perspective among government policymakers is evaporating rapidly due to retirement and private brain drain– Fewer protections against bad decisions


Outstanding Student Loan Debt Milestones 2010

– Federal and private student loan debt exceeds credit card debt

2011 – Federal and private student loan debt exceeds auto loan debt

2012 – Federal and private student loan debt reaches $1 trillion

2013 – Federal student loan debt reaches $1 trillion on its own– Federal and private student loan debt reaches $1.2 trillion

2014– ?


Milestones Affect Behavior

20042004

20042005

20052006

20062006

20072007

20082008

20082009

20092010

20102010

20112011

20122012

20122013

20132014

0

10

20

30

40

50

60

70

80

90

100

Google Web Search Volumestudent loans credit cards


Average Debt at Graduation Increasing

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

$9,320$10,349

$11,491$12,759

$13,767$14,855

$16,030$17,297$17,616$17,940$18,271$18,608

$19,669$20,790

$21,975$23,228

$24,634$26,125

$27,707$29,384

$31,163$33,050

45.5%

49.4% 53.7%

58.4%

59.3%

60.3%

61.2%

62.2%

62.7%

63.2%

63.7%

64.2%

64.8%

65.4%

65.9%

66.5%67.1%

67.7%68.3%

69.0%

69.6%70.2%

Growth in Total Education Debt at GraduationAverage Student Debt % Graduating with Student Loans


2013-14

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Growth in Net Price and Student Debt (Bachelor's Degrees)Average Student Debt Net Price (x4)

Debt Growing Faster than Net Price


2013-14

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Ratio of Student Loan Debt to Net Price (x4)

Debt Growing as a Share of Net Price

Confidential, Distribute Only as permitted by Edvisors Network, Inc.Copyright © Edvisors Network, Inc. (www.edvisors.com) 11

Higher-Cost Colleges Drive Debt at Graduation

Less than $10,000 $10,000 to $19,999 $20,000 to $29,999 $30,000 or more0%

10%

20%

30%

40%

50%

60%

70%

80%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$18,503$21,304

$25,475

$28,747

46%

62%

75% 75%

Annual Cost of Attendance vs. Debt at Graduation, 2011-12Average Debt at Graduation Percent Graduating with Debt

Annual Cost of Attendance (COA)


Low- and Moderate-Income Enrollment Shifting to Lower-Cost Colleges

© 2013 Inceptia

Less than $25K

$25K to $50K

$50K to $75K

$75K to $100K

$100K to $125K

$125K to $150K

$150K to $175K

$175K to $200K

$200K to $225K

$225K to $250K

$250K or more

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Distribution of Enrollment by Degree Program and AGI, 2011-2012Bachelor's Degree Associate's Degree Certificate


Slowing Growth in Number of FAFSAs

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 -

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

11.4 million

14.0 million 14.6 million

16.4 million

19.5 million21.1 million

21.9 million 21.8 million21.2 million

Number of Financial Aid Applications


Ratio of Annual Net Price to Total Income, 2011-2012

Institution Type < $50,000$50,000 to $100,000 > $100,000

Public 2-Year 34.7% 10.8% 5.5%

Public 4-Year 57.2% 21.2% 11.9%

Non-Profit 4-Year 81.8% 31.1% 18.5%

For-Profit 100.8% 26.5% 14.7%

Source: Analysis of data from the 2011-2012 National Postsecondary Student Aid Study (NPSAS)Net Price = College Costs – Gift Aid. Limited to families with positive net price. Net price is for one-year.


College affordability will continue to decline due to a failure of grants to keep pace with increases in college costs

• Federal/state government support will continue to decrease on a per-student, constant-dollar basis

• Burden of paying for college will continue to shift from government to families

Education debt will increase• Family incomes have been flat, forcing increases in student loan debt• Economic recovery will cause a slight drop in the number of students

borrowing• Average debt per borrower will increase

Reauthorization might not make big waves• Zero-sum game assumption grant funding cuts, narrower eligibility• Worries about potential for moral hazard may lead to changes in

Federal PLUS loan eligibility and limits, loan forgiveness programs• Focus on improved counseling and disclosures

Predictions


Simplify federal education loans by merging Stafford, PLUS, Perkins and Consolidation into a single loan program

Loans are a form of financing, not financial aid• Shift all subsidies into grants, leaving loans as pure financing

Base loan limits on ability to repay• Rule of Thumb: Total student loan debt at graduation should

be less than the expected annual starting salary• Base aggregate loan limits on degree level, perhaps also

academic major and specific college or university (based on BLS/Census data)

• Base annual loan limits on remaining aggregate eligibility divided by remaining academic program length, modified by enrollment status

Mandatory repayment through the withholding system, with repayment similar to income-based repayment (IBR) but based on earned income

Designing a Better Loan Program


Default rates would drop significantly• Less business for student loan collection agencies• Cohort default rate much less effective as a proxy for educational

quality

Would need to shift from cohort default rate to a dollar-based repayment rate• Evaluate performance based on financial impact on lender• Measure percentage of original loan balance that is repaid by a

specified number of years into repayment• Compare progress with a benchmark based on 70% using standard

repayment and 30% making no payments or minimal payments• Unify treatment of various repayment loan statuses

• No progress: default, delinquency, deferment, forbearance, negative amortization

• Standard repayment: 7% first year, 15% second year, 24% third year• Extended repayment (25 years): 2% first year, 3% second year, 5% third year

Implications of Mandatory Repayment


Cohort Default Rates Lack Predictive Value

10 or fewer

11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100 101-150 151-200 201-250 251-300 301-350 351+0%

10%

20%

30%

40%

50%

60%

70%

Percentage of Colleges with High Year to Year Deviation in CDRsPredictive Power (2-Year CDR) Predictive Power (3-Year CDR)

Number of Borrowers in Repayment


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Thank You!

Mark Kantrowitz

Publisher, Edvisors.com

Follow on Twitter: @mkant

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Copyright © Edvisors Network, Inc. () The Future of Student Lending and Financial Aid Mark Kantrowitz, Senior VP and Publisher, Edvisors.com