Why the Student Loan Problem Is Even Worse Than You Think

This post comes from Mitchell D. Weiss at partner site Credit.com.

The Federal Reserve Bank of New York published its latest Quarterly Report on Household Debt and Credit recently, and, as usual, the real story about student loans is buried in its back pages.

The report highlights the fact that loan payment delinquency rates continue to improve (i.e., decline). On average, a little over 7 percent of all outstanding consumer debt obligations are in some stage of delinquency (30 or more days past due), and roughly 70 percent of those are seriously so (90 or more days past due).

The executive summary also notes that student loan balances that are 90 or more days past due represent 11.5 percent of the total outstanding. Sure, it’s a troubling metric. But when the Federal Reserve Bank juxtaposes that amount with the 9.5 percent of comparably delinquent (and equally uncollateralized) credit card debt, it doesn’t seem so out of whack — until you dig a little deeper.

Unlike credit card balances, not all outstanding student loans are due at any given moment in time. In fact, of the approximately $1.2 trillion of education debt that’s currently on the books, only about half of that amount is actually amortizing (the other half pertains to loans for students who are still in school).

So the 11.5 percent is really closer to 23 percent because the total amount of delinquent loans should be divided by $600 billion instead of $1.2 trillion. What’s more, these are just the loans that are 90-plus days past due. What of the debts that are 30 or 60 days late? Curiously, that data is nowhere to be found, except for a strong clue in the back of the report.

A closer look at the numbers

One of the graphs in the report is entitled “New Delinquency Balances by Loan Type.” It depicts contract balances that became 30 or more days past due during the preceding quarter. For the period ending Dec. 31, $29.36 billion worth of student loans migrated into the past-due column, which, when divided by the approximately $600 billion of loans that are currently being repaid, amounts to an additional 5 percent of delinquency.

There is also another category that doesn’t get nearly enough attention: the loans that have been granted temporary relief in the form of payment deferments and other forbearance arrangements. These contracts are troubled, and accommodations of this type mask the extent to which the debts may be only temporarily relocated to “current” status from “past due.”

All considered, it would not be surprising to learn that one-third or more of all education debts that are in repayment mode are troubled, particularly when — per the report’s spreadsheet — more than $100 billion of student loan balances migrated into delinquency in each of the past few years.

How we got here

Anyone with reasonable experience in this field should rightly ask, “Why are so many loans deteriorating and why aren’t the servicers preventing that from happening?”

I can think of four possible answers.

  1. At least one-third of all the loans that were made should not have been approved in the first place.
  2. The servicers’ goals are at cross-purposes with those of the borrowers and their benefactors (the government, in the case of FFEL loans, and co-signers in the case of private student loans).
  3. The servicers are grossly incompetent.
  4. Some combination of the above.

My money’s on No. 4, for a couple reasons.

The first has to do with the Federal Student Aid department’s recently released First Quarter Customer Service Performance Results. The FSA evaluated 11 nonprofit and four for-profit loan servicers for overall customer satisfaction, and the efficacy of their default prevention efforts.

No servicer attained the recommended customer satisfaction score of higher than 80 (out of a possible 100), and only one scored the national average of 76. Interestingly, there were no industry benchmarks against which these particular servicers’ default prevention efforts could be measured. The data is instead compared within that 15-member pool, which undermines the metric’s usefulness.

The second reason for my bet has to do with the extent to which the servicers are beholden to others. Several for- and not-for-profit loan servicing companies have successfully securitized portions of the government-backed and private student loans they currently administer. So when seriously troubled loans require restructuring (extensions of repayment terms) or modification (reduction in principal balance, abatement of interest rate), it would be fair to speculate that the servicers are reticent to take actions that run contrary to their investors’ interests.

This situation is likely to deteriorate even further as new firms stream into the so-called servicing-rights marketplace, which is all the more reason for a national standard to govern the administration of these debts.

Student loan borrowers are suffering through substandard customer service, half-baked solutions that are crammed down their throats and one-sided contracts that limit their recourse. Their plight is real, the problem is growing and the need for action is urgent.

A good starting point would be to capture and properly analyze all the pertinent data so that everyone can see how bad this state of affairs really is.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

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  • Bob

    Colleges are also partly to blame. I went back to school after my military service and watched with awe as counselors consistently steered and signed students up for courses they did not need, nor could they use them for credit towards graduation.
    When students went to sign up with mandatory classes for a particular degree program often the number of slots available were less than 50% of what was needed. Thus counselors would tell students they could sign up for “Underwater Basket Weaving 101″ and thus qualify for full-time and get full Pell Grant and student loans. Add this to a very common attitude of “I don’t have to pay for it until after I graduate” it starts out as a recipe for financial disaster. Yes, government regulations make students take a couple of pieces of paper that are designed to inform them and have them sign a paper stating they understand…unfortunately, it is a process similar to Mom & Dad giving a teenager a credit to go to the Mall. I’m not saying students shouldn’t be responsible…but we as adults should set them up for success….Not Failure!

  • jmaz

    Colleges are a LOT to blame. Most PUBLIC universities are CONSTITUTIONALLY MANDATED to be “affordable” for their residents. $12K a year is NOT affordable to middle-class Americans. It’s not – at all.

  • Sarah

    First the cost of college is insanely expensive and all colleges/universities do is try to get as much money as they can from students no matter what the outcome. They don’t care about what happens after you graduate as long as your student loan check clears. As a result you have poor desperate students like myself scrambling to make ends meet while being threatened with legal action by a loan shark (bank that got bailed out at MY expense) if I’m even one day late during my grace period in student loan payments(15 days before you’re charged a late “fee”). It makes me hate this country so much! I have no rights, can’t afford a lawyer and am sick of being harassed because I’m poor and graduated when the Recession was in full swing. My cost?

    I can’t have a family, a house, a career, or a life. I could have a really nice home if I didn’t have a student loan payment and refinancing is impossible. I know some students who just gave up altogether. They can’t feed themselves and pay for CEO bonuses at the same time. If your total income is $1,500 before taxes and your loans are forcing you to pay $1,000/month how long do you think it will be before someone is homeless or just refuses to stop paying? Others have paid over $10,000 in just interest alone for one year. What’s going to happen when the student loan bubble bursts?

    The link offers a “variable repayment interest based on Libor rates”. Are you kidding me Stacy Johnson? I’ve read the scandal concerning the manipulation of the Libor rate and my interest rate is less than the variable interest rates on 99% of my loans. I just need a REAL job! Am I going to have to work like an illegal immigrant and take jobs that pay less but don’t have taxes taken out of my pay? This is ridiculous and of course the news won’t report on this.

    I want to pay my student loans back but can’t afford to move, can’t afford to pay rent, bills and student loans all at once. I can’t afford bankruptcy either. The biggest setback is that there is no way I can pay the loans off or even dream of moving to where I could get a job that even pays a living wage. This is frustrating to say the least. All the while you take on part and full time jobs that won’t pay for a month’s worth of gas and old people are calling you lazy and worthless! Trying to refinance isn’t going to work either as they falsely claim I was late on one payment. There is no clause or proof of this in my entire repayment history or promissory note and yet again I’m too poor to afford a lawyer to get help on this.

    Big Banks +100,000 – Students -0. People wonder why so many give up, have kids and live on welfare. It’s impossible to get ahead in this country let alone stay afloat. I’ve worked for so many scumbags who want me to give them 100% of my skill set while paying me less than 25% of the pay I would get if I could afford to move to a city or out of this joke of a state. This country is pathetic. Keep screwing over the hardworking young and when we just stop paying for your worthless old rich butts don’t whine to us when you finally have to pick up your tab.