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?
More on MSN Money:
Online schools target poor people, convince them to take out $100,000 in federally secured loans for a worthless degree.
I owe 70,000 in student loans. I took these loans out when I was going for my masters in accounting but also when I had a well paying job. In 2009, I lost my job due company downsizing and since I had that masters degree it seemed to be I could not get hired for a staff accounting position or a store clerk to boot for those 2 years . I also lost my house and I had to move in with relatives.
Fast forward 2013, I found a job with my state 2 years ago performing audits but for 30% less than I was making out in the private sector as an accountant. Private sector auditors make far more than my 37,000 per year (gross) salary (net way far less) and I have not had a raise in that time. I can not afford to pay on the loans like I want too. At this time I regret going to college, all it has done has piled debt on me that I will be carrying for a very long time.....
This wouldn`t surprise me.Colleges keep raising prices and getting out from under a
college loan is almost impossible.In France it`s free to go to college because the
government knows college grades will make so much more and pay a ton of
taxes for decades.I guess they`re smarter than us.
Let’s remember that financial lobbying interests got rid of the student loan bankruptcy protections a while ago – most recently further chiseled down in 2005 (say what, isn’t that about five years ago?). Let’s also note that banks get money loaned to them at less than one percent while students pay more than five percent. So how can this be a surprise, when students are taking the double whammy of (1.) interest rate disparity sanctioned by their government and (2.) a specially legislated inability to discharge student loan debt when extraordinary circumstances (like extended loss of employment, catastrophic illness, injury and even death) make it impossible for them to repay the loan(s)? (Yes, Virginia, there are banks demanding repayment from bereaved parents whose child [frequently a veteran] has had the temerity to lose their life before the student loans are paid off. Imagine trying to process the grief of losing a child and having the friendly student loan banker harassing you about the high interest rate loan the banker gets funded for less than one percent!)
Bankruptcy protection is acknowledged in the Torah, and was instituted in British Law in 1542. Even Genghis Khan’s secret legal code allowed three bankruptcies per person before imposing a death penalty. It is only our modern world, with its “corporate personhood” and government of-by-and-for-those-who-can-buy-it which has eliminated this time honored relief.
It is probably time for a modest proposal, that government revisit regulation of banking in its entirety. Allow the current banking model/construct to persist, and institute a parallel one, regulated as a public utility for the non-corporate persons. Then let’s see which one/who flourishes.
This issue is larger than this and there is no one person or institution at fault. Some of the root causes:
1) Profit schools making false claims about cost, quality, and outcomes.
2) Students making poor choices in degree options (yes that BA in French and Dance, Pre-colonial Indian Medicine, or Sports Medicine makes you hard to employ)
3) Students actively avoiding repayment through deferment by taking part time classes indefinitely.
4) High Schools failing to actively hold graduation requirements to a standard of quality (grads are increasingly needing to take remedial courses in math, writing, etc.).
5) Students deciding to go to school through loans who have no desire to graduate, they're just avoiding working out of High School
6) Profit schools for targeting low income, first generation, and minority students (students with access to resources outside of normal channels and who have no familial knowledge to help guide them)
7) Students not actively pursuing other funding options (scholarships, work, etc.)
8) Entry level colleges (community, city, junior, etc.) who are beginning, more and more, to use placement level courses (less than 100 level) as a funding stream.
9) The government and lending agencies for easy access to loans.
10) Parents for all of the above.
11) Graduates who hold out for a specific job in their field. Actively deciding not to look in "related" fields for gainful employment.
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