January 30, 2012

Student Loan Delinquency Rate Jumps 22 Percent

The student loan industry faces a triple threat with wider economic implications.

The student loan industry – issuer of more than $1 trillion in unsecured debt - faces a triple threat with far reaching implications, according to a report released today by FICO Labs. Heavier borrowing, lower credit ratings among borrowers and rising student loan delinquency rates could ultimately burden U.S. taxpayers and slow economic growth.

Default rates have increased nearly 22 percent for student loans originated in the last two years, compared to student loans originated from 2005 to 2007, according to FICO, an analytics firm that tracks consumer credit risk. The earlier loans have a 12.4 percent delinquency rate, compared to a 15.1 percent rate for loans issued from 2010 to 2012.

Accompanying this trend is a decline in creditworthiness among borrowers and increasing loan amounts, according to FICO. The median FICO score among borrowers dropped 17 points between October of 2005 and October 2010. At the same time, the average student debt load increased 58 percent from $17,333 in 2005 to $27,253 in 2012.

“This situation is simply unsustainable and we’re already suffering the consequences,” Dr. Andrew Jennings, chief analytics officer for FICO, said in a statement. Contributing to the increased risk of student loan defaults are a weak job market and slow wage growth.

Concern over student loan defaults is rising among bank risk managers, according to a FICO survey conducted in December, which found that 59 percent of participants expect student loan delinquencies to rise over the next six months.

“The stakeholders in the student lending industry have to take a hard look at the terms and repayment rules for student loans,” Jennings said, “and the industry may have to develop a new lending model to prevent a bad situation from getting completely out of hand.”

The fallout from heavy student borrowing can be far reaching, according to Jennings “As more people default on their student loans, their credit ratings will drop, making it harder for them to access new credit and help grow the economy. Even people who stay current on their student loans are dealing with very large debts, which reduces the money they have available to spend elsewhere. ”

In the worst-case scenario, Jennings said, “taxpayers could be on the hook for many billions of dollars in government-backed loans.”

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