Student loans have different characteristics than a typical loan and are somewhat unique for a few reasons. The most prevalent and one of the major issues is that there are very few reasons that can disqualify someone applying for a loan that is backed by the federal government. A felony or a previous default is about the only two reasons an applicant may get denied. Normal concerns such as the financial situation and creditworthiness of the borrower do not apply to applicants of a student loan.
It is in fact the only type of loan where creditworthiness is simply a non-factor, as it always measured but weighed differently with different types of loan products. (secured vs. unsecured, etc.). Student loans are very accessible to a wide audience and the rising cost of colleges is adding to the growing bubble that seems to be forming. Generally, when an endless supply of money is able to be accessed so easily, a bubble generally will form that will become unsustainable.
According to the Federal Reserve Bank of New York’s last quarterly release, student loans that are 90 days or more overdue are currently at the highest level ever in the United States. This past quarter the report showed that student loans that are 90 days past due stood at 8.9%, an increase from the prior quarter that showed a rate of 8.7%. Student loan delinquency rates are continually making new highs, and are the most elevated they have been since the Federal Reserve began to keep records in 2003. At the moment, a little over 11.0% of loans that are 90 days late have been deemed delinquent.
What is very worrisome is that the 11.0% student loan delinquency rate exceeds all other forms of bad credit loans and other debt. Meaning , students loans have a greater delinquency rate that auto loans, mortgages and credit cards. Credit cards with a balance that is 90 days or more over due have about a 10% delinquency rate while mortgages and auto loans are 5.9% and 4.3%, respectively. According to some analysts, the delinquency rates for student loans are expected to be almost the Federal Reserve’s official figure.
It is a bit technical concerning the status or what the stage the loan is in, as almost 50% of the loans are currently in grace periods or deferment, and are for the moment out of the repayment cycle. Effectively this means that some student loans are being labeled as okay and in the repayment cycle, when in fact they just have not reached to delinquency status.
The student debt problem (Student Loan Infographic) is only getting larger as the bubble seems to grow despite the well-know problem. For the first time, student borrowing exceeded the $100 billion mark in 2010. And in 2011, the total outstanding student loan was greater than $1 trillion. Moreover, student loan debt at $1 trillion is currently greater than the credit card debt in the United States, which equates to about $798 billion. It is disappointing that the problem is being created yet again by a Government policy.
In 2010, about 1 in 5 households in the country are burdened with a student loan, holding an average of about $26,000 in liability. What is most unfortunate about this forthcoming crisis is that the impact will be great affecting a majority of the borrowers, most notably the students. Student loans are a bit different than other sorts of outstanding debt like credit cards and mortgage debt, as they are unable to be discharged by a bankruptcy claim.
The ramifications of a student loan meltdown will not end with the students, as other immediate family members will certainly be impacted. According to a report from the National Association of Consumer Bankruptcy Attorneys, borrowing amongst parents of students is up over 75% since 2005. Parents have been hindered with student loans due to weak economy, and the youngest age group having the highest unemployment.
Student loans are expected to rise and average about $50,000 during a normal 10-year repayment period. According to the Wall Street Journal, as of this March of this year, the delinquency percentage for those borrowers ages forty to forty-nine was just under 12%. SmartMoney.com reports that having to be forced to repay student loans for young workers unemployed has taken its toll on many folks, as some cannot save enough capital to cover their expected retirement costs.
The larger the problem is allowed to grow the greater the effects will be on multiple generations. Folks need to understand the problem as many people will be negatively affected since student loan defaults will have a domino effect in other markets. SmartMoney.com has stated that in Q1 of 2012, over 2 million people that are 60 year olds or greater were holding student loan debt. The burden of the debt is expected to hurts many credit scores and can also be a factor when trying to obtain a professional license.
If an individual has an outstanding federal student loan, the government has the right to garnish wages, seize tax refunds and alter social security payments. According to SmartMoney.com, in 2012 the government altered 115,000 retirees’ social security checks.