Uh-oh! The Student Loan Crisis Is Even Worse Than You Think

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College student collecting money for college. Student loan/financial aid concept.Please see some similar pictures from my portfo
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By Mitchell D. Weiss

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 FRBNY 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 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 FRBNY'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 is an op/ed contribution to Credit.com. Mitchell D. Weiss says since 2008, "he's led a management consulting practice, advising banks, private equity firms, small businesses and professional practices."

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75 Comments

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dmoth88

so. .the GOP set it up so fake on-line worthless degree colleges can shepherd kids to take out loans . . and what do you expect?

March 21 2014 at 11:58 AM Report abuse -1 rate up rate down Reply
wenumafet

Study something in which you can find employment. History, poetry and psychology are great subjects, however there are no jobs for them. Go to a junior college for 1-2 years and then a state school. Work, stay out of trouble and live with you family. Stay out of debt. Parents, do not pay for your kid to go to some fancy school. Also, start saving when they are born.
If its too late and you are already in debt up to your eyeballs, paying off student debts should be the same as your other debts - live below your means for a while... The first step should be getting rid of credit cards... Then I would try and cut out whatever expenses you have and don't need... or at least minimize expenses. I would first check out insurance costs (especially auto)... they are massive drains. Look to bring your payments down to $25/month (check 4AutoInsuranceQuote, they are cheapest - Insurance Panda also good). I would also try to minimize gas costs with the GasBuddy app. Once you finally get your spending under control, you'll realize that you can start paying off your debt FAST.
But the key first is to go to college for something that will actually be useful - and not spend too much money doing so!

March 20 2014 at 3:01 PM Report abuse +1 rate up rate down Reply
Tom

It must be our terrific economy that we keep hearing about from the liar in charge.

March 20 2014 at 4:48 AM Report abuse +2 rate up rate down Reply
texastotenmom

http://www.teaparty-platform.com/ <~~n lets finally put a stop to obombus record unemployment n record foreclosures for the last five years now, n bring american jobs back to america n get america moving forward once again. !!

March 20 2014 at 4:08 AM Report abuse +3 rate up rate down Reply
gpfs

Because of the Student Loan program, tuitions are as high as they are. The future economic repercussions will have a negative effect on the economy for decades. This program needs to be totally revamped, based on national needs for skills. High needs such as math, science, engineering and health could have zero interest if you graduate and work in your field for a minimum of five years. Other skills the interest rate could be sliding based on the national needs.

March 20 2014 at 2:15 AM Report abuse +1 rate up rate down Reply
1 reply to gpfs's comment
rgdmjj

Tuition is high because there are so many private colleges that charge too much, add on fees the student was never informed about, etc.

March 20 2014 at 3:53 AM Report abuse -1 rate up rate down Reply
1 reply to rgdmjj's comment
timkinetron

oh bullshit, if you can't afford something then you don't buy it. enough of the bailouts of the privileged....

March 20 2014 at 10:40 AM Report abuse +1 rate up rate down
Socialobserver

By Law college loan payments should be an automatic withdrawal from the borrower's pay check. The person repaying the loan would have a re-payment schedule option between 10-30 years. A repayment percentage would also be applied to part-time employment income. Tax refunds and windfall income would automatically be applied to the loan until the debt was paid-in-full.

March 20 2014 at 1:59 AM Report abuse +1 rate up rate down Reply
maometto

Study something in which you can find employment. History, poetry and psychology are great subjects, however there are no jobs for them. Go to a junior college for 1-2 years and then a state school. Work, stay out of trouble and live with you family. Stay out of debt. Parents, do not pay for your kid to go to some fancy school. Also, start saving when they are born.

March 20 2014 at 12:23 AM Report abuse +4 rate up rate down Reply
2 replies to maometto's comment
Steve

You have completely nailed the proper strategy for a college education in one paragraph this should be required reading by everyone thinking about college. Well done.

March 20 2014 at 2:42 AM Report abuse rate up rate down Reply
donmorris11

I basically agree with this, though costs are getting so out of control that even conscientious students and parents are getting shafted. I teach at a Community College, and even the STEM grads in things like engineering or electronics are having a rough go of it. Costs at the CC's and public universities they transfer into are going way way up, while the jobs in even these valuable fields are getting shipped out to India, or Indians are brought into the US as dirt-cheap labor on an H1b visa. So there's not a safe and sensible major anymore. And even the ones who try to work their way through school still wind up with a lot of debt, college costs are getting too high and both the banks and the government and making it worse with all the crazy interest and fees.

It's just stupid to finance higher education with debt, no other country in the industrialized does this except for England. Everywhere else, if you're good enough to study at college, you leave with no debt at all. My cousin learned some German and went to Germany to finish his training, no debt at all. Finished and was able to start up his business and start a family, already building his savings. Same for friends now in Sweden, and Netherlands, Belgium, even one down in Brazil. And when you do the calculations, those places actually have less taxes, ex no property taxes there, no franchise or local + state taxes, they just manage things better. Why should middle class families in the US have to sock away precious savings to pay the bloated salaries of some overpaid college administrator, stadium or the bank financing the student loans? Seems like the best move for a lot of families in the US these days is to learn a language and emigrate.

March 20 2014 at 11:26 PM Report abuse +1 rate up rate down Reply
Mantis

The whole thing is a complete mess. When all these "easy money" guaranteed loans started happening, colleges jacked up their rates WAY above the normal increase. They charge absorbent amounts and the textbook industry is even worse. Used books are a thing of the past since most textbook manufacturers release a "new" edition every year that changes a couple of words here and there. This forces students to often buy the new book and get ZERO value for the old book. Textbooks for a full course often go over 1k in costs. It is to the point it is almost not worth it to go to a University. Also, don't get me started about "online colleges". Their degrees often are not even worth the paper it is printed on.

March 20 2014 at 12:19 AM Report abuse +3 rate up rate down Reply
petpetdon

These kids take a student load and then major in a subject that has no job potential. Just because you have a college degree doesn't make it easy to get a job. We need more mechanics, plumbers, electricians, garbage men then we do CEOs, bankers and lawyers.

March 20 2014 at 12:12 AM Report abuse +1 rate up rate down Reply
2 replies to petpetdon's comment
Mantis

If you want to be a garbage man, you shouldn't be in college. Also, if you want to be a mechanic, plumber, electrician, etc... Go to a 2 year technical college for that. Those are not university jobs. You are just wasting money if that's what you want. Get a 2-year degree and go straight into those fields.

March 20 2014 at 12:21 AM Report abuse rate up rate down Reply
donmorris11

Totally agree with you, way too many CEOs, bankers and lawyers, and the problem is these MBA idiots are finding ways to cut down even on jobs for mechanics, plumbers and electricians. I teach kids who go into these fields at community college, and the cost per course hour has gone way up, forcing these kids into debt. Meanwhile companies are important Indians on cheap-labor H1b visas even for things like mechanics and plumbers!

March 20 2014 at 11:28 PM Report abuse +2 rate up rate down Reply
ivyteainn

Let the banks eat the debt. They're ******* the life blood of the people in the first place. With as much paper wealth as they have, they can afford it. No tears shed for the banks on my part.

March 19 2014 at 11:50 PM Report abuse -3 rate up rate down Reply
1 reply to ivyteainn's comment
evans.mom

Aren't most of these federal student loans?

March 20 2014 at 12:14 AM Report abuse +1 rate up rate down Reply
1 reply to evans.mom's comment
jj2301

Exactly. The Fed is now administering and underwriting the programs. If colleges and their faculty want more business, let them front the capital to lend. Any other business looking to grow has to get VC or risk its own assets to fund growth. Colleges should not get a free pass on this.

March 20 2014 at 11:14 AM Report abuse +2 rate up rate down