Not to belabor the topic of student loans, but some recent numbers reported by The Wall Street Journal draw even more attention to the growing amount of debt taken on by college students. In a previous blog post, we discussed the dangerous path that private student loans are traveling down, but today we are focusing on the huge student loan debt that is made possible by the federal government. Ninety three percent of student loans this past year were made by the government.
The WSJ article cites numbers from the Federal Reserve that show the student loan debt rose by $42 billion or 4.6% in the third quarter. The total debt stands at $956 billion. At the end of September, payments on 11% of student loan balances were 90 days or greater past due.
In comparison, during the third quarter, overall household borrowing fell and the 11% past due rate now exceeds the past due rate for credit cards. The numbers cited indicate that delinquency rates for all other consumer-debt categories fell or remained constant over the same period.
Long Term Consequences
There is rising concern that the government is encouraging students to take on too much debt. Government student loan programs do not ask for collateral and do not ask much if anything at all about a borrower’s ability to repay the loan or the type of education he or she intends to pursue. This is increasingly problematic as the cost of education outpaces the average salaries for many areas of study. The goal of these recent government loan programs, to make college affordable for more students, is certainly a worthwhile goal. However, these loans can turn into much larger problems for these students down the road.
It is commonly known that student loans are not discharged in bankruptcy so they are going to stick with a borrower. If a borrower falls behind on payments and falls in serious delinquency, his or her credit score will suffer. The snowball starts to roll because now that individual must face higher rates if he or she tries to borrow money for other items. Suddenly interest rates on a new car or on a mortgage are going to be several points higher because of the damage the student loan debt causes. Many students and recent graduates work out deferments or extended payback periods, but again this simply pushes the debt down the road.
Since 2007 student debt has grown by more than 56%. During the same time period, overall household debt fell by 18% to $11.31 trillion. Household debt includes student loans, so that means that there has been a significant decrease in mortgage, auto and credit card debt that has been offset by a huge increase in student loan debt.
Each borrower tells a different version of the same story. Many college drop outs and graduates have simply chosen to quit paying on the loans because they are unable to do so. They keep deferring or negotiating with the collection companies to hold off payments.