Student Loan Time Bomb Is Ticking Louder
Two things are very clear in the Federal Reserve Bank of New York's latest Quarterly Report on Household Debt and Credit: Americans have once again started borrowing, and student loans remain a ticking time bomb.
The Fed uses data from Equifax (EFX) to identify trends in consumer credit, and its report on the fourth quarter of 2014 show that consumer credit continues to increase overall. Total balances increased $117 billion, or 1.0 percent, driven by growth across virtually every type of credit. Delinquencies and defaults continue to improve for most types of loans. Mortgages, auto loans and credit cards continue to see improving trends, with more people able to make payments on time. Credit card delinquencies are at their lowest levels since 1999.
However, one area stands out: student loans. The 90+ delinquency rate (which measures the percentage of student loan accounts that are 90 or more days past due) has been skyrocketing. An incredible 11.3 percent of students loans are now 90 days or more past due -- up from 8.7 percent in the fourth quarter of 2009. The latest figure adds up to over $100 billion of overdue student loans.
Debt That Won't Go Away
This problem will only get worse. When students borrow money, no real consideration of their ability to repay is taken into account. People majoring in computer science at world class universities can often borrow just as much as people majoring in fine arts. While I strongly believe in a liberal arts education (and benefited from one myself), we have to recognize that the earning potential is dramatically different depending upon your area of study. Many students are waking up with debt that they will never be able to service.
Even worse, most student loans cannot be eliminated in bankruptcy. Although there are opportunities for people with federal loans to take advantage of means-based repayment, students with private loans are still largely out of luck, at the whim of their servicing companies. I have met too many people earning $25,000 a year with $50,000 of private student loans that will never go away.
The Fed labelled this "an ever-increasing pool of delinquent debt." The student loan debt burden can have significant economic implications for the borrowers, the government and society. First, the U.S. taxpayer is on the hook for the $100 billion (and growing) balance of student loan debt that people cannot afford to pay back.
This Affects You, Too
Just lending students more money to fund education -- without thinking about their ability to repay -- is a recipe for disaster. I wonder if sub-prime mortgage underwriters who lost their jobs in 2008 are now working for the government. And it is definitely time for an audit of the loss recognition policies of the US federal student loan portfolio. The government thinks it is making money from student loans. If we start building adequate reserves for student loans in default, that picture may look very different.
But the true loss is to the people with the debt and the larger economy. Having defaulted student loan debt that never goes away means that an individual will have limited ability to be a productive member of society. They will buy fewer cars, save less for retirement and have more stressful lives because they will be receiving daily calls from collection agencies trying to recoup the high interest and fees associated with a decision made in their teens. America has thrived because of a reset button available to all; the next generation has been robbed of that opportunity.
There was a time when you could pay for college by working a part-time job. And there was a time when a college education made sense, regardless of the cost or the major. Unfortunately, we no longer live in that world. And we are not preparing teenagers for the biggest financial decision of their lives. With delinquency already at 11.3 percent, we can only expect it to get worse.
There are two small nuggets of opportunity. First, the private sector is creating opportunities for people to refinance their student loan debt. At least 19 student loan refinance options exist. If your interest rate is above 6 percent, and you have a good job and income, you may be able to find a much lower interest rate with some of these new providers. Given the size of the student loan market, it is not a surprise that a vibrant refinance market will start to develop.
In addition, recent legislation for federal student loans has created the opportunity to lower your payments with an income-driven repayment plan. If you have a private loan, your options are more limited. But you should still give your servicer a call and see what options exist.
Keep an eye on that 90+ delinquency measure. The higher it gets, the harder it will be for us to ignore this problem.