Delinquency in consumer debt has reached its lowest point in five years, with the exception of student loans, the Federal Reserve Bank of New York reports. Until 2009, young adults with student debt were more likely to own homes than people of the same age without them; and they also were more likely to have car loans and higher credit scores. Now, the opposite is true: those carrying student loan debt are less likely to take out a mortgage or have auto loans, and their credit scores are poorer. Young adults with student debt also are more likely to be living with their parents.
With most personal loans, those who owe the most are more likely to default; but the opposite appears to be true for student loans. “This suggests that borrowers who default are overwhelmingly noncompleters,” said Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau. “These borrowers take on some debt but do not benefit from the wage increase associated with a degree.”
The report shows that, for the fourth quarter of 2013, 11.5 percent of student loans were at least 90 days behind in payments. Among credit cards, the rate was just 9.5 percent. The numbers do not account for the fact that nearly half of student loans outstanding do not currently require any payment at all, either because the borrower is still in school or has been able to defer payment.
Federal student loans are now essentially made by colleges, using government money and with no underwriting criteria or limits on how much a student can borrow. Such a program may be abused by colleges too eager to get their hands on the money. When it comes to programs that do not offer conventional degrees, such as for-profit private schools, the Department of Education is trying to develop a “gainful employment” rule that would exclude programs that have a history of not producing graduates who can earn enough to repay the debt. Private-sector colleges, however, indicate that they will fight such a rule. The Department of Education may instead develop a “skin in the game” rule for colleges. If a former students defaults frequently, the college may be required to pay a significant penalty, which could discourage colleges from promoting programs that do not help their students. Colleges whose alumni are better at repaying loans may receive a financial reward.