A recent TransUnion study has revealed that more than half of student loan accounts are in deferred status, where the repayment of the principal and interest of the loan is temporarily delayed.
In my experience the primary reason people do this is when the full student loan payments are unaffordable and they need falsely perceived breathing room.
Deferred loans now represent 43.5% of all student loan balances. The study also found that reported student loan balances increased by 75% between 2007 and 2012, with the average student loan debt per borrower increasing 30% to $23,829.
The combination of rapidly expanding student loan debt and the evidenced unaffordable repayments is just taking us closer and closer to a national crisis over student loans.
“With the economy either in recession or slowly coming out of it during the study period, we had expected that student loan balances might increase as consumers frustrated with the job market went back to school to work toward a different career path,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “However, the rate of growth we observed was truly eye opening.”
The study noted that deferments may be an issue, because more than half of college graduates under the age of 25 are either unemployed or underemployed — the highest rate in 11 years, according to an analysis of government data.* This construct is exacerbated by the increases in both student loan balances and deferred balances.
Between 2007 and 2012, balances of reported deferred loans jumped from $228 billion to $388 billion. In that same period, average student loan balances per borrower across all risk spectrums increased from $18,379 to $23,829.
“It is especially noteworthy that more than half the student loans in our study were in deferment, and with unemployment rates remaining high, particularly among recent graduates, the repayment of these loans remains a concern,” said Becker. “Students can defer their loans for only a certain period, often up to three years. After that, these students can find themselves in a difficult position financially.”
And deferred loans continue to build interest, further increasing the loan balance and making them that much more unaffordable.
The TransUnion study also highlighted the disparity between federally backed student loans, i.e. those guaranteed by the government, and private student loans — those issued by private lenders, most often to cover the gap between funds made available by government loans and actual tuition rates. Federal loans made up 92% of all student loan accounts and 86% of overall balances. Between 2007 and 2012, federal loan balances jumped 97% while private loan balances only rose 4%.
But thankfully the government backed loans offer reasonable repayment options like the income contingent repayment plan and income based repayment plans. Private loans do not.
As billions of dollars were added to student loan balances between 2007 and 2012, delinquency rates also increased. Yet the distinction in performance between federally backed student loans and private student loans was material. From 2007 to 2012, federal student loan delinquencies rose 27%, while private loan delinquency rates actually dropped 2% in that same timeframe. The 90+ day delinquency rate for federal loans was 12.31% as of March 2012, compared to 5.33% for private loans.
“It’s important to highlight that both federal and private student loan delinquency rates are higher than most other credit products such as mortgages, home equity lines of credit, credit cards and auto loans,” said Becker. “While the focus in recent years has been on the mortgage market, lenders will need to keep an eye on student loan portfolios — and on customers who have student loan debt — as the high delinquency rates among these borrowers can spell trouble across multiple products.”
About the study
TransUnion’s study extracted data from the TransUnion consumer credit database for all consumers with at least one active student loan between March 2007-2012. Student loans reviewed included open accounts with a balance or closed accounts with a balance that had not been charged off. All active accounts were further segmented as being either in repayment or in deferred status.
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