Higher education tuition and fees have more than doubled since 2000—a rate faster than real estate appreciation during the housing bubble, according to a study on student lending by Moody’s Analytics.
Student loan performance has been consistent, as well as delinquency and loss rates on outstanding student loans, the study reports. Student lending is still growing quickly, though less quickly than in recent years. Origination numbers are also increasing.
Driving the demand for loans are demographics and education costs. The 16- to 24-year-old demographic is growing, and today, 40% of high school graduates pursue some type of higher education.
When faced with limited job prospects, many pursue further education, hoping they’ll find a better job upon completion, according to the report. But today, students must incur more debt to complete a program, and still can’t find jobs upon graduation. This will likely dissuade some students from pursuing higher education.
For those choosing to still pursue further education, there ‘s limited school financial aid. The amount depends on the economic cycle and government policies, as well as endowment and grant performance, says the survey.
Other trends the report cites:
• Students are considering alternative programs. One nontraditional option is the for-profit school. Though its enrollment comprises less than 10% of all students, growth has more than tripled in the past decade.
For-profit schools, vocational schools, and online colleges cater to high school graduates and older students, offering a flexible class schedule. But schools generally suffer from low graduation rates and a lack of in-demand degrees offered. And when students don’t graduate, they still must repay their student loans, but with no extra qualifications.
• Private loan volume has dramatically increased. And these loans are now being used to finance other expenses besides education-related services.
• Legislation has changed the student lending game. The most dramatic change was the elimination of the Federal Family Education Loan Program (FFELP), in which the government directly subsidized loans, and financial institutions could no longer collect a fee for offering these loans.
• Student loan delinquencies are increasing. Recent student loan originations are actually performing worse than those from the lending boom, which means student loan origination standards haven’t been tightened as other loan standards were, according to the report.
Moody’s Analytics predicts the 16- to 29-year-old demographic will peak this year, remain high until late 2012, and then decline in 2014. With that, the company predicts the percentage of high school graduates—potential borrowers—pursuing further education will increase.
Moody’s predicts the growth rate of total tuition will slow as more students pursue less expensive education options, although tuition will continue to rise quicker than overall inflation for the next decade.
The company also predicts delinquency and failure rates will rise because students won’t be able to pay their loans, as income remains lower than what student borrowers anticipated.
Overall, student loans haven’t shown much improvement despite broader economic improvements. Today a degree doesn’t necessarily mean a student can repay their loans, and as a result, students may pursue cheaper options for higher education, or forgo it altogether, the company points out.
Moody’s says this could mean a less educated work force, and therefore, a less productive one—which would be detrimental to the U.S. economy, especially relative to other countries.
Next: Sorting out the schools
Sorting out the schools
Simply choosing a university is more complicated today than it has been in the past. The market includes many types of higher education institutions, and students must decide which can best meet their educational needs.
To better understand and serve the financial needs of student-members, credit union lenders can use this guide.
The Institute for Higher Education Policy’s study of student loan delinquency, featured in the September Credit Union Magazine ("The growing student debt burden"), studied five types of higher education institutions: public four-years, for-profit four-years, private nonprofit four-years, public two-years, and for-profit two-years.
Here’s a quick look at the differences between nonprofit and for-profit schools, and public and private schools:
• Nonprofit schools. The traditional model for higher education is the nonprofit school. The nonprofit school is funded by state and private grants, as well as by tuition paid by students. Its primary goal is educating students, and is granted special tax privileges by the IRS.
An active board of trustees governs the school, and the board hires a headmaster. This way, the school can outlive its founder. Typically, nonprofit schools offer a broad liberal arts education, with the option for housing, meals, and student extracurricular activities.
• For-profit schools. A for-profit school is controlled by its owner or a small group of owners, and its primary objective is to make money or turn a profit. It’s typically more career-focused, sometimes with a vocational or technology slant.
It’s also generally more targeted toward adult and nontraditional learners. It offers the option to enroll part-time and take online classes more often than nonprofit schools.
Additionally, because the for-profit school is run like a business, it doesn’t have to respond to student concerns. All final decisions rest with the owner(s). These schools are also typically easier to get into, since every interested student can bring money in.
• Public schools. Public schools are largely supported by state funds. If a student attends a state university in his or her state, tuition is typically cheaper than at a private school. It’s lower because students and/or their parents pay taxes to the state, and their attendance, then, is less heavily funded by state funds.
But if a student attends a state university in a state other than where they reside, it can cost significantly more for them to attend. Public universities normally have a larger enrollment than private schools, and have a higher student-to-professor ratio.
• Private schools. Private school funding is made up primarily of income from tuition and endowments. Tuition is usually higher than at state schools, but there is also typically more scholarship money available to offset high tuition costs. Private schools normally have fewer students, and a lower student-to-professor ratio.
Private colleges can include religious, liberal arts, and technology colleges, as well as vocational and technical schools (although these last two also can be public).