Rising Student Loan Debt: What’s the Solution?

Treasury: It looks a lot like the housing bubble

by James Frischling, President & Roger Pietka, Associate, NewOak

Student loan debt surpassed $1.3 trillion as of the second quarter of 2014 and has essentially doubled since the start of the Great Recession in December 2007, according to the Federal Reserve. By comparison, consumer credit, excluding student loans, has declined since the Great Recession. Over the past six years, student loans outstanding have gone from representing about 25% of total consumer credit to over 40%. This rise has the Treasury Department concerned that the situation is all too similar to the U.S. housing market bubble.

So why is the issue so important? Because a generation of heavily indebted consumers is an impediment to growth.

The alarming figures, big government concerns and ample media coverage are all there, but what are we doing about this growing problem? Regrettably, the answer is very little, though there are a few efforts attempting to address the issue that deserve attention.

On the education side, Ron Lieber of The New York Times wrote an article this weekend about a website called College Abacus that allows people to research the cost of college by more efficiently harnessing the calculators schools accepting federal money have to provide on their websites. Despite the resistance of some institutions to allow College Abacus access to their calculators, anything that makes the cost of college more transparent and creates a more educated consumer is an important step toward solving the problem.

On the markets side, Social Finance, Inc., a specialized lender, has closed a number of securitizations of refinanced student loans for graduate borrowers successfully. This will result in the lowering of borrowing costs for its members while also creating an attractive investment opportunity for its investors.

While neither the educational or market solution will solve the growing problem of student loan debt on their own, together they demonstrate actions that are addressing the issue. Other educators and market professionals should take notice as they know that imitation is the highest form of flattery.

Lower Occupancy Forces Military Housing Projects to Tap Procurement Alternatives

As the size of active-duty U.S. military forces continues to shrink as a result of federal budgetary and sequestration constraints, military housing initiatives are being forced to adopt alternative procurement provisions to help sustain healthy operations and occupancy levels. Tenant waterfall and utility procurement are among such provisions, set in place to mitigate and control the financial viability of a military housing project.

Originally designed to help procurement during periods of deployment, the alternative tenant provision gives management the ability to offer designated housing to undesignated junior officers, civilian military personnel and ultimately the general public during sustained periods of sub-95% occupancy.
Today, tenant alternative waterfalls are being implemented by property managers, not as a result of deployment, but as a way to offset the decrease in overall available military personnel. Fort Hamilton is a poster child example of how tapping the tenant waterfall has allowed the project to sustain revenues and overall operations. To wit, retirees and Defense Department employees now account for 26% of Hamilton’s 91% occupancy. Debt service coverage across classes for Fort Hamilton now ranges from 1.45 to 1.03.

Utility cost procurements are another, more recent measure property managers can implement which allows them to stabilize utility costs based on set thresholds from historically aggregated data. Military personnel are rewarded for under-consuming utilities, unaffected if within average, and penalized via an out-of-pocket expense if utilities are utilized above set thresholds.

This utility procurement measure has had a positive impact on utility expense growth: over the last six years, projects applying this measure have realized a less than 1% annual increase in utility expenses. Utilities are, of course, a major expense driver as they can account for up to 40% of total expenses.

With only a few exceptions, most military housing initiatives have experienced a decrease in occupancy over the past year, resulting in lower revenues and ultimately debt service coverage abilities. Of Moody’s rated initiatives, the majority have experienced declines in occupancy and debt servicing abilities from 2012 to 2013. Further, occupancy and debt service declines have been echoed by ratings downgrades from Fort Irwin to Hampton Roads in 2014. Some initiatives, in particular those in the Army branch, will experience more substantial declines in personnel than others as the DoD restructures the military force to a pre-World War II size. As the decline in active-duty personnel affects revenue streams, housing management must be proactive in controlling both ends of the income statement.