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Report on college loan delinquency rate raises alarms - latimes.com:
Reporting from Washington— Some experts have called the nation's soaring college debt load a "ticking time bomb" — a looming crisis threatening young adults, their families and the broader economy.
A new report raises even more alarms: It's likely that as many as 1 in 4 borrowers was carrying a past-due student loan balance in the third quarter, the Federal Reserve Bank of New York said Monday.
That's a much higher delinquency rate than previously thought. By a more conventional measure, the New York Fed said, 5.4 million of 37 million borrowers with student loan balances had at least one past-due student loan account — a 14.6% rate.
Many educators are concerned about the increasing financial squeeze on college students and their families and the repercussions for the nation's economy.
W. Norton Grubb, a professor at UC Berkeley's School of Education, is worried that rising debt levels are forcing some students to drop out. Only 40% to 50% of those enrolling at universities such as the California State University schools end up completing their degrees, he said.
Such figures have helped bolster a long-held belief by scholars that America's declining or stagnant college graduation rates have become an Achilles' heel in the competitive global economy.
The New York Fed report concluded that "student loan debt is not just a concern for the young. Parents and the federal government shoulder a substantial part of the post-secondary education bill."
Skyrocketing debts may be pushing some graduates into areas of work that have a bigger immediate payoff, such as finance, as opposed to what they want to do or what may produce more benefits for them and society in the long run.
"The debt levels are distorting what fields people are taking on," Grubb said.
The New York Fed said the past-due balances on student loans amounted to $85 billion, or about 10% of the total owed. The same 10% rate applies on average to other types of consumer delinquent debt, such as mortgages and credit cards.
But Fed researchers said delinquency figures for student loans understate the magnitude of the problem. That's because the calculations don't take into account that federally guaranteed loans, which make up the bulk of student debt, typically don't require repayment while borrowers are still in school and for six months after graduation.
If those who are temporarily exempt from making payments are excluded, the report said, the number of borrowers with past-due balances would jump to 27% of the total. And the outstanding balances that are late would rise to 21%. Both figures are about double the unadjusted rates.
As for private, non-guaranteed student loans, Moody's Investors Service reported recently that the default rate in the fourth quarter was 5.1%, about the same as a year earlier.
Still, that rate is about double what it was before the 2007-09 recession. Moreover, the Moody's report noted that some private student loan measures indicated that the pace of defaults is rising and that the problem isn't likely to get better any time soon.
"High unemployment will keep defaults high," Moody's said.
Economists, meanwhile, have differing opinions about the strain of student loans to the broader economy. But there's reason to be concerned on this front.
When asked about such risks by a lawmaker in a hearing last week, Federal Reserve Chairman Ben S. Bernanke replied, "Well, student loans are becoming a very large category of loans."
Indeed, the New York Fed put the latest outstanding student loan balance at $870 billion. That's more than the total credit card debt, $693 billion, and car loan debt, $730 billion.
What's different about student loans is that most of the lending is done by the U.S. government. Even so, as Bernanke noted, if federal lending isn't well managed, it could hurt taxpayers.
Bernanke, in his exchange with lawmakers, added a personal dimension to the student loan issue, saying that his son in medical school expects to owe $400,000 when he graduates.
About 167,000 people, or about one-half of 1% of all student-loan borrowers, owe more than $200,000, the New York Fed said in its report, which drew from Equifax credit data. The average balance per borrower: $23,300.
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