5/13/2013 3:12 PM ET|
Are student loans the next subprime disaster?
The average debt load has grown by 30% in 5 years. Delinquencies rose by 22% in the same period. This spells trouble on many levels.
About to graduate and worrying about your debt load? You've got reason for concern. More than half of all student loan accounts are currently deferred, according to a study from the TransUnion credit bureau.
In other words: Half of college grads aren't earning enough to make loan payments.
That's not the only scary stat. The average student debt load has gone up 30% in the past five years, and 33% of the nearly $966 billion in outstanding loans is owed by the riskiest candidates."The number of student loans held by subprime borrowers is growing, and more of those loans are souring, the latest signs that a weak job market and rising debt loads are squeezing recent graduates," reports The Wall Street Journal.
Some experts refer to college loans as "the next subprime," a reference to the subprime mortgage crisis that led up to the recession of 2008.
There's no simple fix for this crisis, either. In fact, the loan situation could affect new and recent graduates' finances for years or even decades to come.
Ezra Becker of TransUnion has said that lenders should be watching student loan portfolios at least as warily as they have mortgages. They should be watching the graduates, too.
"The high delinquency rates among these borrowers can spell trouble across multiple products," Becker told Forbes magazine.
- Most student loans are federal ones, which means your paycheck could be garnished or your tax return withheld if you don't pay up.
- Stop making loan payments and your credit score could dive as much as 100 points -- which in turn lays a smackdown on interest rates if you need a car loan. (Try triple or almost quadruple the rate you might otherwise have paid.)
- Higher rates for auto loans or mortgages mean reduced buying power -- if you can afford to buy at all.
High debt could mean postponing marriage, homeownership and children. Some already blame the loan crisis for stifling the housing market, according to this MSN Money article.
High loans, high unemployment
Another recent study from Fair Isaac Corp. (FICO) notes the student loan delinquency rate rose 22% in five years. Since that study doesn't include deferred loans, "the number of people who can't afford to pay back that money may be almost twice as high as what the official (rates) reflect,"reports Time magazine's Martha White.
Things are even worse for the nearly 30% of students who borrowed money but didn't finish school. Because they didn't get the degrees they won't be likely to earn as much, but they still carry a high amount of debt.
That is, if they or their onetime classmates get jobs at all. The Forbes article notes that more than half of under-25 college grads are unemployed or underemployed.
One reason jobs aren't as available is that not as many people are retiring. Some have to keep working because their retirement plans took such a hit in the recession. Others don't have enough saved and can't afford to live on Social Security. According to White, more parents are delaying their retirement to help pay for their children's loans.
Hard to blame Mom and Dad for not quitting when they're helping you with your loans -- and maybe housing you, too. According to the Pew Research Center, 27% of middle-aged parents provide primary support for a grown child. To complicate matters further, 21% are also helping their own parents financially.
Know your rights
Delinquency can damage your credit score, as noted above. If you foresee problems, contact the lender to ask for the short-term grace period known as forbearance. Don't skip a payment and don't wait until the last minute, as the details take time.
Loan deferment is a possibility if you're unemployed, on active military duty or in grad school. But it's a stopgap measure: Federal loans have a three-year limit.
Student debt sticks with you like gum on a sneaker -- it's almost impossible to discharge. But you do have rights, according to Benjamin Feldman of Credit.com. Among them:
- The right to pay based on income. That includes the "pay as you earn" plan (10% of discretionary income based on income and family size), the income-based repayment plan (15% of discretionary income) and the income-contingent repayment plan (20% of monthly discretionary income, for low-income borrowers who don't qualify for the other plans).
- The right to consolidate loans. Got a bunch of federal loans? Turn them into one monthly payment.
- The right to loan forgiveness. Teachers in low-income communities may get up to $17,500 in loans forgiven under the Teacher Forgiveness Loan Program. Those who work in a number of public service jobs -- including emergency management, law enforcement, public health, early-childhood education, the military and school-based services -- may be eligible once they've made 120 payments under the Public Service Loan Forgiveness Program.
- The right to change payments. A typical repayment plan is for 10 years. However, you can extend it to 25 years, decreasing the monthly amount due (while increasing the interest paid). Or you can go for a graduated plan, starting low and upping the amount every two years.
- The right to deduct interest. Federal student loan interest payments can be deducted from taxable income.
Readers: Are you or a family member saddled with heavy college debt? Got any tips to share?
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