The student loan crisis may be even worse than it previously appeared: Not only are college students graduating with more debt than ever, but their risk of defaulting on their loans is higher than ever, a new study by FICO Labs reveals.
FICO Labs looked at 10 million consumer credit files for its most recent research report and it found that since 2005 the average amount of student loan debt has risen by a whopping 58 percent to more than $27,253 in 2012 compared to $17,233 in 2005. At the same time, balances owed on credit cards and auto loans decreased during that same seven-year period as consumers tried to reduce their level of indebtedness.
Higher levels of debt are joined by a growing trend in delinquencies. Loans are considered delinquent when they are 90 days or more past due.
Looking at two two-year periods, FICO found that delinquency rates on existing student loans increased from 17 percent between October 2005 and October 2007 to 25.1 percent between October 2010 and October 2012. That represents a whopping 47 percent rise in delinquencies.
Delinquency rates on new student loans fared a bit better, with roughly 12 percent of loans originating in 2005-2007 being delinquent compared to 15.1 percent for loans originated in 2010-2012, representing a 22 percent increase.
Bankers Don't Think It's Going to Get BetterSoon
FICO's quarterly survey of bank risk managers, released in December 2012, showed that nearly 60 percent of survey respondents expect higher levels of student loan delinquencies over the next six months. By contrast, these respondents do expect delinquencies on all other types of debt, such as credit card debt, mortgage loans, and car loans, to decline over that period.
There are several issues that contribute to the increasing likelihood of student loan defaults:
Higher levels of student loan debt make repayment more difficult.
A weak economy has prevented many graduating students from finding employment and has meant that those who do find jobs are frequently underemployed.
FICO scores for recent student loan approvals are lower than in the past. FICO research shows that the median credit score for an approved student loan in October 2010 was 641, compared to 659 in October 2005. FICO says this may be due to the increasing number of federally subsidized student loans, which have less stringent credit standards than private loans. Fewer private student loans are available today than in the past.
As far as different kinds of debt, student loans are looked at just like any other installment loan, except that having a large amount of student loan debt isn't given quite as much negative weight on your credit score by FICO as having high levels of credit card debt.
Still, just as with any other debt, a solid repayment history on student loans will help your credit score, while defaulting on them will significantly lower it.