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November 28, 2012

Student Debt, Delinquencies Skyrocket

Posted in: Uncategorized

The New York Fed released their household credit and debt report yesterday, and they show increases in student loan debt relative to other forms (mortgage, credit card, auto loan and others). To keep this in perspective, mortgage debt represents 71% of all debt, and student debt represents about 8-9%. So there’s still a wide gulf here, and we shouldn’t jump to call this the “student loan bubble.” The scales of the markets are in no way similar.

However, student loan debt is defaulting at higher and higher rates, and that should raise a lot of concern, since it has downstream effects for recent college graduates throughout the economy.

A recent New York Fed study found that 94% of recent graduates had borrowed to help pay for their education, and average debt levels among student borrowers is $23,000. Remember, that average includes seasoned borrowers, who presumably borrowed less and also in many cases reduced the principal amount of their loans, so the average amount borrowed by recent grads is certain to be higher. Student debt is senior to all other consumer debt; unlike, say, credit card balances, Social Security payments can be garnished to pay delinquencies. As a result, it has contributed to the fall in the homeownership rate, since many young people who want to buy a house can’t because their level of student debt prevents them from getting a mortgage [...]

Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter. Repeat: in the last quarter. Annualized, that’s a 19.7% rate of increase* during a period when other consumer borrowings were on the decline. And this growth is taking place while borrower distress is becoming acute. 11% of the loans were 90+ days delinquent, up from 8.9% at the close of last quarter. The underlying credit picture is certain to be worse, since many borrowers aren’t even required to service loans (as in they are still in school or have gotten a postponement, which is available to the unemployed for a short period). And it was the only type of consumer debt to show rising delinquency rates.

This is the new subprime: escalating borrowing taking place as loan quality is lousy and getting worse. And in keeping with parallel to subprime, one of the big reasons is, to use a cliche from that product, anyone who can fog a mirror can get a loan.

The WSJ blames a push toward federal student lending, and I agree that loosened standards and an assumption toward student loans to pay for college is a bad trend (though the feds have also promoted 529 and Coverdell savings plan for families to get a head start on education funding). But the bigger problem here is the rising cost of higher education generally. You can argue that the accessibility of easy lending facilitates the cost rises – the market cannot adapt if there’s no such thing as a breaking point for cost. But I do think this boards of trustees must come up for some blame here as well. Too much money in higher ed goes toward fat salaries for administrators and unnecessary building renovations. There doesn’t seem to be any oversight over the process.

Student debt was a prime motivator for the Occupy movement. Some real oversight in higher education costs would go a long way toward driving that problem back down. But the easy accessibility to lending should raise concerns as well.


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