Student loans steadily crept up through 2015, and delinquency rates remain high for borrowers.
In the fourth quarter of 2015, “outstanding student loan balances” reached $1.23 trillion, a $29 billion increase, according to a new report from the Federal Reserve Bank of New York.
Serious delinquency, where borrowers are more than 90 days late in making payments, comprises 11.5 percent of aggregate student loan debt. That’s a conservative estimate, as the New York Fed noted that about half of student loans are outside the repayment cycle through grace periods, deferment, or forbearance. Were it not for those qualifications, serious delinquency rates could be “roughly twice as high.”
Almost one out of four student loan borrowers, then, face some sort of financial distress by failing to pay back their loans on time.
Student loans weren’t always leading delinquency rates for different sources of debt. As recently as 2012, credit card delinquency rates were higher. As more students take student loans and build debt, some peculiar characteristics of the student loan industry caused the change.
“Student loans, unlike any other form of consumer credit, generally cannot be discharged in bankruptcy. That means delinquent and even defaulted loans can appear for considerably longer periods of time, keeping delinquency rates up. As loans are paid off and cycle out of the system, troubled ones linger on,” Danielle Douglas-Gabriel wrote for The Washington Post.
Bad debt cycles out of the finance system for credit cards and most other forms of debt. Student loans, however, cannot be dismissed even through bankruptcy, so delinquency rates don’t fall unless students pay off the debt.
Credit card delinquency rates have declined since 2010, along with mortgage and auto loan delinquencies, but student loan delinquency rates have climbed since 2003. The more debt that accumulates, the harder it is for that trend to reverse.
Given the nature of student loans, aggregate delinquency rates aren’t as illuminating as the rate at which the aggregate increases. That rate could slow as the public discovers income-based repayment plans where the federal government ties monthly payments to a borrower’s income. The Post noted that income-based repayment plans almost doubled enrollments between September 2014 and September 2015. With payments leveling off, borrowers can repay their loans and exit delinquency.
With income-based repayment, however, student loans could be costlier to the government than anticipated. After 20 or 25 years, the outstanding student debt balance gets forgiven. For tax purposes, borrowers remain responsible for that forgiven debt, but it means that the students who borrowed the most won’t always repay the full amount.
That won’t be the most common result, however. The students who borrow the most tend to be those who enroll in law school or medical school and earn enough to repay their balances. Smaller amounts of student loans are more likely to fall into delinquency, and income-based repayment gives those borrowers a chance to catch up on payments and avoid default.
