Student loan debt, delinquencies escalate

story by Kim Souza

Zeek Miller, a 25-year-old waiter in Northwest Arkansas, hasn’t cashed a tax refund check for the past two years as it has been garnished by the federal government for delinquent student loans.

He’s among the growing class of young consumers struggling to repay an average $26,600 in student loan debt.

A Feb. 28 report released by the Federal Reserve Bank of New York found that student loan debt in the United States is now approaching $1 trillion, and is the only kind of household debt that continued to rise throughout the Great Recession.

Student debt almost tripled between 2004 and 2012 and stood at $966 billion as of December 2012. During those years the number of borrowers increased 70% as did the average balance owed per person.

The study cited several reasons for the escalating loan balances:
• More people chose to attend college and graduate school when the economy tanked in 2008 and jobs could not be found;
• Students are staying in school longer and completing fewer hours in a year’s time but borrowing each year they are in school; and,
• Students have taken advantage of lower repayment rates as borrowers delay payments through deferments and forbearances.

The higher burden of student loans and higher delinquencies may affect borrowers’ access to other types of credit and the performance of other debt, according to Joel Doelger, spokesman with Credit Counseling of Arkansas.

“Students have to be careful about the debt they take on while in college, but for many the reality hits once the are asked to start repayment,” he added.

He said a young consumer facing $26,000 or more in student loan debt is like having a second car payment and it can crunch budgets for several years after graduation.

Sarah Chapman, 26, received a rude awakening awakening six months after she graduated from LSU in 2009.

“The government consolidated all my loans into one payment which was convenient and they put me on a seven year payoff term. Needless to say, I couldn't afford the payments. I extended to the loan to 14 years because the interest rate was low and the payment affordable,” she said. “I've been paying them since early 2010 and I still feel like the amount owed never decreases.”

Angela Marie, a social worker who lives in Ohio, says she’s not ashamed of the $46,000 in student loan debt she accumulated over the years. But she recently started to repay the debt.

“I am a social worker (bachelor’s level) who graduated in 2007. The only thing that I have going for me is that the government has a ‘forgiveness’ program. If I pay every month for 10 years straight never missing a payment, then the rest of my loan is forgiven."

Marie says the catch is the monthly payment runs $300, which is hard to cover with a $14 per-hour job.

She says the reality is if she doesn’t pay the $300 per month, her wages will be garnished because of the time the loan has already spent in forbearance.

The student loan report found about 17% of borrowers were past due on their student debt by more than 90 days in 2012, a large increase from under 10% in 2004.

Roughly 44% of borrowers are not yet in repayment phase, because a large percentage of students chose forbearance and deferral options which are made available to borrowers facing financial difficulties.

The transition rate of borrowers in repayment from current to delinquent has been rising since 2008 from around 6% to nearly 9%.


High levels of student debt delinquency reduces young borrowers’ ability to secure other types of credit, Doelger said.

Scott Hoyt, senior economic director with Moody’s Analytics, said in a phone interview, that student loan debt is slightly under 10% the size of mortgage debt in the United States, but he agrees that delinquency rates are trending higher for the student loans. He says this will mean a certain percentage of young Americans won’t be able to purchase a home or secure other lines of credit until they first eliminate some of their college loans.

In terms of overall impact, Hoyt said the student loan delinquencies don’t pose a serious threat to the macro economic recovery given they are much smaller in scale when compared to housing debt.

He said more than 80% of student loans are also guaranteed by the Federal Government, not private banks. These delinquencies could add to the federal deficit, but Hoyt doesn’t see the rise in bad debt causing much havoc in the overall financial markets.

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mixed bag

I think a general scaling back of the rampant enthusiasm/disregard we saw for borrowing last decade is a good thing. So on the whole I appreciate the article's approach. That said, I'm skeptical of some of the anecdotes here. For example, a 7-year repayment period is highly atypical. You'd usually only see it in a case where your balance was so low that you only need to pay the standard minimum $50/month to pay it off - in this case an original balance of roughly $3,000. Likewise, to qualify for the Public Service Loan Forgiveness, the Social Worker would essentially have to be in the IBR program. Based on the wages she notes, she'd have to work 65 hours per week 52 weeks a year to need to pay $300/month. So either her numbers are wrong, or she has a spouse with additional income/loans that is skewing the outcome but is a crucial part of the equation. Assuming she were single with no kids and working 40 hours/week, her IBR payment would be about $150/month. The trouble with most of these types of self-reported anecdotes is that they often leave out very crucial details, or in some cases may even be reporting the data wrong. So in an attempt to educate the public, I'm a bit concerned that they're often mis-educating.

Borrowers don't understand

"The government" does not consolidate loans, student loan borrowers make the choice to consolidate, as well as their repayment term, and there are none fewer than 10 years. This young ladt clearly doesn't understand what she got herself in to, and that is the problem. Not escalating college costs, but borrowers who are clueless before, during, and afterwards.