Blog Post by: Benjamin Landy, on December 12, 2012
Americans have paid off some $1.7 trillion in mortgage, home equity, car loan, and credit card debt since the height of the recession, according to the latest Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York. The overall delinquency rate has fallen, too, as consumers have gotten better at paying their loans back on time. But one sector of the credit market continues to grow unabated. Outstanding student loan debt has increased $350 billion since the third quarter of 2008, when every other form of credit was collapsing. Student loans surpassed credit card debt for the first time in 2010, and now total more than one trillion dollars.
Making matters worse, the percentage of that trillion dollar debt that is 90 days delinquent or more spiked unexpectedly last quarter, from 8.9 percent to 11 percent—an increase representing more than half a million delinquent borrowers in three months, for a total approaching 6 million. But almost half of all student loans are in deferment or in grace periods, and "therefore temporarily not in the repayment cycle," according to the NY Fed. That means the real number of loans that should be considered delinquent is "roughly twice as high"—closer to 22 percent. The spike last quarter in the reported figure in the direction of that upward bound likely has a lot to do with the three-year maximum that students are allowed to defer their loans due to unemployment or economic hardship. For many borrowers, the three-year grace period that began at the height of the recession in 2009 is now over.
Although the economy has recovered significantly in the last few years, it should come as no surprise that student loan borrowers are struggling to pay their bills. Job opportunities and earnings for college graduates have fallen dramatically relative to pre-recession levels: the unemployment rate for young graduates was 8.8 percent last year, according to a recent report from the Institute for College Access and Success. Among those who wanted to work full time, one in five were working part time or had left the labor market entirely. The situation is even worse for the one in three students who take out loans each year but never graduate.
Thankfully, millions of students who graduated during the recession were able to defer their loan repayments while they looked for a job. But the three-year grace period allowed by most lenders is ending for those borrowers who tried to enter the job market in 2009 as unemployment skyrocketed. Today's rising delinquency rate may have a ways to go before it levels off or begins to drop.
Part of the problem is that student loans are the only kind of debt that cannot be discharged in bankruptcy. As Catherine Rampell notes, the ability to declare bankruptcy is one reason that consumers have been able to write off so much debt in the aftermath of the financial crisis. That strategy has been limited for students since 1976, very limited since 1984, and nearly impossible since 2005. Although recent legislation has enabled some debtors to apply for income-based repayment plans, lenders are still legally allowed to garnish 10 percent of defaulted borrowers' wages, including Social Security and retirement benefits, for a period of twenty years.
With the national student loan balance in excess of $1 trillion, a growing number of delinquencies, and few options to escape repayment, many experts are asking whether America's rising student debt could be the next "subprime" crisis. In some ways the comparison is overblown: student loans still comprise only 8.5 percent of the total credit market—far less than the mortgages (71 percent) that were at the heart of the last crisis. The majority of student loans are guaranteed by the federal government, limiting market exposure to widespread defaults.
But in other ways, the comparison—and the fear—is warranted. At its current rate of expansion, total outstanding student debt will reach $1.3 trillion in less than three years—the same size as outstanding subprime mortgage loans in late 2007 before the credit market collapsed. But instead of underwater mortgages and overleveraged financial institutions, the student loan bubble presages an indebted, underemployed generation; incapable of contributing to the consumer economy and "underwater" on the value of their "subprime" education in a weak labor market.
College seniors who graduated with student loans in 2010 owed an average $25,250 each—an increase of 5 percent from the previous year alone. As a result, people in their 20s and 30s are delaying marriage and children, and putting off traditional life purchases like cars and housing in favor of car-sharing services and renting—something that would have been unthinkable a generation ago, when a bachelor's degree was considered a stepping stone to a middle-class lifestyle. Unless we can find a way to interrupt that trend, and bring the soaring cost of higher education back in line with its social and economic value, we may find the demographics and culture of consumer society continuing to change in more damaging and unexpected ways.
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