Here’s why student loan delinquencies are so high

The share of U.S. student debt delinquent for at least 90 days rose slightly to 11.45 percent in the second quarter, according to the latest report on household debt and credit from the Federal Reserve Bank of New York.

That percentage has nearly doubled from a decade earlier, when it was 6.71 percent.

Student loan delinquency now is worse than mortgage repayment was at the depths of the housing crash, according to the same dataset.

Furthermore, experts believe that the reported delinquency rate understates the true level of non-repayment. Only 37 percent of student borrowers are in repayment and up-to-date on their payments, because roughly half of them are still in school, in deferment, or in another program that lets them avoid payments.

Widespread delinquency is a major problem for borrowers and the taxpayers who back most of their loans. It’s getting worse at the same time that unemployment is falling, jobs are opening up and foreclosures and other kinds of debt problems are abating.

Here are some reasons why:

1. Bad student loans don’t go away

Unlike many other forms of debt, student loans are generally not dischargeable in bankruptcy.

As a result, defaulted student loans haven’t been removed from household balance sheets the way other kinds of debt have during the recession, a fact reflected by the $1.2 trillion in total U.S. student debt recorded by the New York Fed.

Over the past several years, the quality of U.S. housing-related debt has improved as bad loans have been discharged and banks have tightened lending standards for new loans. Bad student loans, on the other hand, have not been wiped off the books, and new federal loans are not underwritten but instead given to students attending eligible schools.

Newer student loans have seen fewer repayment problems. Department of Education data, due to be updated Thursday morning, shows the default rates for recent college borrowers have come down in recent years as the job market has improved. But there are billions of dollars in existing problem loans still stuck on the books.

2. Many students took out ill-advised loans during the crisis

“The job market was weak — it still is weak in many respects — for many people, and many thought they could get ahead by going to school,” said Matt Ribe, the director of legislative affairs for the nonprofit National Foundation for Credit Counseling.

Many of the people who tried to escape the recession in school weren’t successful for a “variety of factors,” he said. Because the ease of taking out student loans “doesn’t put urgency on borrowers, before they go to school, to go through a rigorous process” of budgeting and understanding repayment, many of those students later failed to get degrees and then had trouble paying their loans.

The cohort who entered college in fall 2008, as the financial crisis hit, was 12 percent larger than the group the year before, according to the National Student Clearinghouse. The increase was driven partly by older students, people enrolling part-time and students at community and for-profit schools — all of whom have lower graduation rates than traditional students. The result was lower graduation rates, especially among non-traditional students.

In general, it is people who do not graduate who struggle to pay off college debt. Only 3.5 percent of graduates with a bachelor’s or associate’s degree default on their loans. The vast majority of defaulters are people who failed to finish or obtained only a certificate, not a degree.

3. People don’t prioritize student debt

Part of the problem is that people do not prioritize repaying student debt, said Jason Delisle, a higher education finance expert at the centrist New America Foundation.

“There’s a psychological aspect to it. There’s a prioritization aspect to it,” Delisle said. “There’s also an incentive.”

Delisle and a colleague conducted focus groups on attitudes toward repaying student loans for a study published in March. What they found was that people were calculated and often rational in falling behind on their payments.

“The mortgage is important, the car loans are important, this is important, the school loans are not important,” one respondent said in the focus group, in a typical comment.

Unlike home loans, student loans don’t have any collateral that can be seized by lenders. And unlike credit cards, student loans don’t have interest rates that can soar in response to late payments.

“It’s very rational in that regard to be late on a student loan rather than something else,” Delisle said.

Borrowers also reported feeling ripped off on their student loans, or cheated because they weren’t able to find the job they thought they would get by going back to school.

And sometimes they just preferred not to think about student loans at all, even though federal student loans offer options to cap payments as a share of income and then eventually forgive them.

“In many cases the borrower just doesn’t want to engage with the collection agency because they just don’t see any way out,” said Ribe, who suggested counseling as a way to help borrowers understand their options.

4. Parent-plus loans

Mark Kantrowitz, senior vice president for the financial aid information website Edvisors.com, suggested that part of the reason student loan delinquencies are worse than other kinds of debt is because of a change made in 2008.

Starting in 2008, the government began allowing borrowers of federal Parent PLUS loans to defer payment while students were in school and until graduation.

As a results, those loans, taken out by parents to help pay for their kids’ education, didn’t start becoming due until years later in many cases. Many of them were made to students who weren’t prepared for school and were leaving school in the teeth of the recession.

“What we’re seeing is a delayed effect of the financial difficulties,” Kantrowitz said.

Such loans are not broken out from other kinds of student loans in the New York Fed data. Kantrowitz said that if he is right, delinquencies will start declining in the next few quarters.

Ribe was not so sure when or if repayment problems would start to abate.

“That’s the $1.2 trillion question.”