December 14, 2012

Student loan delinquencies hit new high

Late last year, total student debt outstanding surpassed $1 trillion for the first time. Now, the problem of student loan delinquency is generating its own eye-popping numbers.

New data released today shows 11% of student loans were 90 days or more past due in the third quarter, up from 8.9% in the previous quarter and 8.8% a year prior, according to the Federal Reserve Bank of New York. It’s also the highest since at least 2003, when the bank first started tracking student loan delinquencies. “It’s a red flag and a warning sign that more Americans are struggling to repay their student loans — things are bad, really bad, and getting worse,” says Rich Williams, higher-education advocate at the U.S. Public Interest Research Group, a nonprofit based in Washington.

The latest data comes at a time when delinquencies on many other consumer debts, including credit cards and mortgages, are dropping. Overall, delinquency rates on outstanding consumer debt fell to 8.9% in the third quarter, from 10% a year prior, according to the FRBNY.

And the rise in student-loan delinquencies could be far from over. The FRBNY’s calculation counts borrowers who are in deferment or forbearance — periods during which they can put off payments without penalty — as being current on their loans. But there’s no telling whether these borrowers will be able to keep up with payments once these temporary relief periods are over. More than 1.5 million federal student loan borrowers were in economic-hardship deferment (which is granted for hardships like unemployment) and in forbearance (which borrowers can apply for if they can’t afford to repay this debt based on their current income) at the end of September 2009, up 26% from a year prior, according to the latest data from FinAid.org, which tracks student loan debt. That number could be higher now given the high unemployment rates that have persisted since then.

To be sure, some experts say student-loan debt is still nowhere near becoming a real economic crisis. That would require the two-year default rate on federal student loans, which was 9.1% at the end of September 2011, to triple, says Mark Kantrowitz, publisher of FinAid.org.

Still, for students, the burden continues to grow. As college costs keep climbing and free financial aid is slashed, students have been signing up for more loans in order to cover their tuition bills. Students who graduated with a Bachelor’s degree this spring left school with roughly $28,700 in student debt, up 31% from five years ago, according to FinAid.org. And in many cases, borrowers who’ve fallen behind on loans dropped out of college. Those borrowers are four times more likely to default on student loans than those who graduate, says Kantrowitz.

The good news, say financial advisers: Borrowers who’ve fallen behind can still get back on track. With federal student loans, if they can’t afford to make regular payments or if their student loan debt exceeds their annual income, they can qualify for income-based repayment in which they’ll pay no more than 10% to 15% of their so-called discretionary income. Some private lenders offer flexible repayment options as well.

articles.marketwatch.com

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