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Student Loans: The Continuing Crisis, Part XVIII

Another dispatch from the United States, whose bizarre system of financing higher education forces university students to take out huge amounts of debt before they have jobs. In the face of a weak job market for new graduates, the system is steadily collapsing:

Student loan debt has been growing every quarter since at least 2003, the earliest data included in the report. And delinquency rates look worse than previously believed.

Outstanding student loan balances totaled $956 billion as of the end of September, rising $42 billion from the previous quarter....

The New York Fed calculates that 11 percent of student loans are now at least 90 days delinquent, with this rate now officially passing the “serious delinquency” rate for credit card debt for the first time.

That milestone may be misleading, though. The report says in a footnote that “these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment or in grace periods and therefore temporarily not in the repayment cycle,” adding, “This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”

It’s worth mentioning, by the way, that student loan debt cannot be discharged in bankruptcy, while most other forms of debt can. One reason consumers have managed to shed so much debt is that lenders ended up writing off quite a bit after the financial crisis.

Yves Smith piles on:

Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter. Repeat: in the last quarter. Annualized, that’s a 19.7% rate of increase* during a period when other consumer borrowings were on the decline. And this growth is taking place while borrower distress is becoming acute. 11% of the loans were 90+ days delinquent, up from 8.9% at the close of last quarter. The underlying credit picture is certain to be worse, since many borrowers aren’t even required to service loans (as in they are still in school or have gotten a postponement, which is available to the unemployed for a short period). And it was the only type of consumer debt to show rising delinquency rates.

This is the new subprime: escalating borrowing taking place as loan quality is lousy and getting worse. And in keeping with parallel to subprime, one of the big reasons is, to use a cliche from that product, anyone who can fog a mirror can get a loan.

The most popular type of loan, Stafford loans, allow undergraduates to borrow up to $57,500, no questions asked. Perversely, this practice, in isolation, looks rational. Look, if you could put borrowers in virtual debt slavery, would you care much about lending standards? All you need to worry about is death and those few cases where borrowers are so clearly unable to ever work for a decent amount of money that they can get their student debt that they can get their loans reduced or discharged.

Things are so bad that each media report seems able to present anecdotes more extreme than previous accounts. The WSJ found a recent graduate of Embry-Riddle Aeronautical University in Daytona Beach whose education loans total nearly $230,000 for a college education that has enabled him to get a job that pays $60,000. And $184,500 of that total was borrowed by his unemployed, disabled mother through a program called Parent Plus.

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Jens

It’s worth mentioning, by the way, that student loan debt cannot be discharged in bankruptcy, while most other forms of debt can.

That's quite interesting. I fail to understand the rationale behind this - why does the lender of a student loan deserve special protection? Would be great if you could explain this, if you find the time. Thanks.

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