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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.

By Donna_Freedman May 13, 2013 11:12AM

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.

For example:
  • 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.
Logo: College graduate (Corbis)
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:

112Comments
May 13, 2013 2:27PM
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As a part time evening instructor at a local extension university in Ft. Wayne IN. on and off the past  25 years ( I have a real job ) I have several "insights".
1- the students are getting 'ripped off' on their tuition and fees - NO exceptions
2- the average recent  HS graduates exhibit about the same skills as a 10th grader 25 years ago
3- at least 50% of these students, particularly the males, would be much better both off now and lifetime learning a trade  (electrician, plumber, mason, etc.) rather than a "C" average degree from a 3rd rate institution.  Females would be wiser  to look at the health field, but this does take 12-36 months of post-secondary education 
4- the studies we keep seeing about college graduates earning  2x, 3x, 4x what a high school graduate  may have been true in the 80's or 90's, but no more; pure journalistic malarkey. .
May 13, 2013 3:30PM
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It's outrageous that the private student loans cannot be "re-financed." I have excellent credit and have never defaulted on the $80k student loans I have, yet I'm paying 9% interest rates because of my parents credit when I was in college. My mortgage is under 4%, and if I wanted to I could refinance that along with my vehicle loan (which is at 2%).

Interest rates are rock bottom but student loan rates are unreasonably high, even for those with good credit who are reliable payers with years of credit history.
May 13, 2013 2:18PM
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Why does college cost so much these days?  Are the classes that much better? For example, it seems accounting basics are accounting basics and have been the same for decades. Ya, the rules and laws change but the basics are the same. General Ledger is still GL and profit and loss is the same, etc. It cost a Doctor 250,000 for basic med school.  You think they are all rich, but it is the older Doctors and the ones that come from overseas that are doing more than ok financially.
We are getting fewer and fewer to enter Med school because they can't pay the loans off unless they specialize. That is the opposite of other countries. They produce more GP's than specialists. We really need to address our problems.
May 13, 2013 1:01PM
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As the price of college keeps rising, less people will go to college because of the money required. This increase is cost combined with a poor job market for recent grads will result in a long term decline in the education level of Americans. As a high tech country it is unnecessary to have many skilled workers and if our schools cannot produce them then US companies will have to continue bringing in educated immigrants from Asia, India, and the Middle East to fill the void. This is already occurring where I live in Silicon Valley, CA. 
May 13, 2013 1:20PM
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Paid the last $6800 of my student loan debt last week. It feels pretty good. I am not the norm however. I only have my AS degree in Computer Science and only had about $12,000 in debt when graduated. I landed an IT job and have moved up in the last 6 years and make $72,000/yr now. Something definetly needs to be done about college costs and the job market. Someone needs to find that balance again. I do want to say dont let this article scare you! Yes student debt sucks and its a tough job market right now, but it doesnt mean that its completly gone. You need your education and when it picks back up, you better have that degree in hand!
May 13, 2013 1:50PM
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The more the federal government helps out the easier it becomes for colleges to raise tuition.  Up the education and grade  requirements and the colleges will have to lower tuition I f they want to  fill the  rosters.
May 13, 2013 10:37PM
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Online schools target poor people, convince them to take out $100,000 in federally secured loans for a worthless degree. 

May 13, 2013 10:33PM
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What a surprise.  The government is in the home lending business and creates the bubble in housing because of all the inexpensive cash that the market-makers Freddie and Fannie made available, and now they are creating the same problem with student loans.  The reason tuition is skyrocketing is the exact same reason home prices skyrocketed.  Availability of funds.  If you have a pulse, the government is more than happy to loan you all the money that schools require you to pay.  There are no market forces at play, no checks and balances.  The school charges more and Uncle Sam advances more.  The government needs to get out of the private sector.  They screw EVERYTHING up.
May 14, 2013 6:55AM
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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.....

May 13, 2013 1:55PM
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The dumbest thing we Americans are allowing right now is-- that we pay outrageous prices for Cable Television and there are NO pay-per-view Gen Ed courses on it. These are template classes every student has to take... kind of like high school refreshers and catch-ups. Based on current costs... they would be 95% CHEAPER on pay-per-view AND taking the Final Exams in these should be the pre- requisite entrance exams for qualifying for university programs. Eliminates entitlements and unfairness in education. Either you pass the test or you move on, no exceptions.
May 13, 2013 12:01PM
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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.

May 13, 2013 10:13PM
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A lot of the time people say that students are in deferment because they are not making enough money to pay back the loans... the fact of the matter is that many students take classes nonstop just to avoid paying student loans back.  I work in education and I see it daily.
May 13, 2013 2:25PM
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Some folks don't believe that a New Normal is upon us. I recently watched a show about a Kia plant in America. It was mostly automated. We aren't that far removed from when it will be 100 percent automated. At some point,  we won't even need repair techs, they will be replaced by robots.

Are there some jobs that can't be outsourced, maybe. Do you know that some corporations are outsourcing their most highly skilled jobs. Well they are and with the ability to connect anywhere anytime via tele-conferences is only growing. At some point, it will be a virtual world connecting those with the highest level skills regardless of location. We all know about the robotic surgeons and potentially where that could lead.

As technology grows, there will be at the very least, less demand for American Grads that demand higher wages. As technology grows, workers will be replaced by automated ones. As technology grows, the elite know that until we reach that point, they can replace you with cheap overseas slave labor.
May 13, 2013 2:28PM
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Absolutely! This along with a sovereign debt, hyper inflation, bond and monetary crisis are the elephants in the room that will implode with greater mass & weight than a neutron star. The mortgage sub-prime market  and housing bubble will frail in comparison when these leviathans fall like dominoes and crash in stages along the same path. When? Who knows? These levels are mathematically impossible to sustain on a grand scale for long periods of time.
May 14, 2013 3:18AM
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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.

May 13, 2013 10:38PM
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The problem with student loans is the appetite of the liberal, education, establishment!  They constantly get raise after raise even when their students have to increase their student loan balance to pay for it!  The fact is, according to CBO numbers, that the cost of a college education has gone up by 1000% since 1960!  That would be bad enough except that this is AFTER figuring in inflation.  This means that the cost of a college education has gone up 10 TIMES in the last 50 years.  This money has been funneled into the pockets of liberals in and out of government!  Talk about money laundering!
May 14, 2013 9:53AM
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The federal government needs to get out of the college loan business.  When they do, you will see salaries of these ultra-liberal professors fall as well as tuition costs.
May 14, 2013 8:02AM
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Students also often over borrow for "living expenses".  I have worked in higher education for over 20 years and it has always been an issue.  Often I will see a student that has a significant portion (if not all) of their tuition covered either by state and federal grants or an outside agency such as OVR and still take out the max in student loans.  This money is then deferred back to the student for living expenses.  It's just easy money for the students and there is nothing a school can do about it.  A student that is eligible can not be denied a student loan by the school.  Schools see this being done and are helpless.  They certify the loan only to know it will eventually go into default and be a negative to the school's default rate.
May 13, 2013 1:04PM
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Employers like hiring employees with a lot of debt because they demand less and are more willing to accept sub par working conditions. Workers who are in debt cannot afford to change jobs often and complain less.
May 14, 2013 11:38AM
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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.

Edit:
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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