We’ve long known that student loan debt was an enormous problem.
Since 2004 the total number of outstanding student loans has nearly quintupled, going from just over $250 billion to around $1.3 trillion. That’s a combination of two main factors. First, according to the Federal Reserve Bank of St. Louis, the number of borrowers grew by about 50 percent between 2005 and 2012. Second, the cost of college has soared, which has caused the average amount of loan debt that a student will graduate with $28,400 in debt, a 28 percent increase between 2007 and 2013.
But we haven’t known how much of a problem young adults were having paying off their student loans. Previous figures from the Department of Education—which has been notoriously opaque when it comes to student loan data—showed that when measured by loan dollars that are at least a month late, the federal government’s main loan program had a 17 percent delinquency rate. The problem with this approach is that about 45 percent of student loans are not in repayment for a number of legitimate reasons, which skews the delinquency rate downward.
This month, the Federal Reserve Bank of St. Louis re-ran the numbers and found that the problem runs much, much deeper. Josh Mitchell reports for the Wall Street Journal:
Student loans are proving to be a much bigger burden on households than previously thought.
Nearly one in three Americans who are now having to pay down their student debt–or a staggering 31.5%–are at least a month behind on their payments, new research from the Federal Reserve Bank of St. Louis suggests. That figure is far higher than official delinquency measures reported by the Education Department and the New York Fed. And it’s also likely the most accurate.
Here’s why: The official measures reflect delinquencies as a share of all Americans with student debt, but millions of borrowers aren’t even required to make payments yet. Many are currently in college or grad school and thus don’t have to make payments until six months after they leave. Others are out of school and past that grace period but have received permission by their lender—the federal government in most cases—to suspend payments for a range of reasons, such as being unemployed.
Another way to look at the size of the problem is the number of graduates who are having trouble paying down their loans, either because they’ve defaulted, become delinquent, or paid down none of their balance despite graduating years earlier. An analysis by the New York Fed finds that about half of all borrowers fit into one of those categories. The problems become especially acute for borrowers who live in low-income areas. Only 37 percent of graduates living in those areas is actively paying off their loan and the aggregate balance is still 97 percent of what it was when they graduated.
The delinquency issue is creating widespread economic problems. Late last year the Treasury warned that since repayment issues are reported to credit agencies they can inhibit young adults “access to future credit for buying a home, starting a business, or completing or furthering education.” Each of those outcomes threaten to take money out of the private economy and ultimately reduce economic growth.
The growing debt problem could also be roiling the $170 billion bond market for government-guaranteed loans. Bloomberg’s Jody Shenn and Matt Scully report:
With borrowers increasingly struggling to repay their student loans, Moody’s Investors Service is warning it may take investors longer than promised to get their money back. The credit grader said this month it may lower rankings on $3 billion of top-rated debt as investors face the threat of slowing principal payments or even receiving no interest.
The concern underscores the fallout from a record $1.2 trillion in U.S. student loans that’s spreading to everything from the housing market and consumer spending to taxpayers. . .
“The recession really hit a large portion of the borrowers who have student loans hard,” Barbara Lambotte, a Moody’s analyst, said in a telephone interview. “Because of that, a significant portion of borrowers have used” various options to avoid paying down their debt.
Fortunately, Congressional Republicans are working to create alternative pathways to help families pay for college. Notably, a bill that would expand tax-free college savings accounts was approved in the Senate Finance Committee this week by a 26-0 vote. Ultimately, much more will be needed to make college more affordable and student debt balances more reasonable, but at least Washington is waking up to the problem.