Student loan bubble collapsing as delinquencies skyrocket

Total student loan debt outstanding reached the $1 trillion mark for the first time late last year. New data from the Federal Reserve Bank’s Quarterly Report on Household Debt and Credit is now showing that the student loan delinquency rate is a growing issue and a “red flag.”

The figures released Thursday suggested that 11 percent of student loans were 90 days or more past due in the third quarter, which is up from 8.9 percent from the previous quarter and 8.8 percent a year ago.  The Federal Reserve Bank of New York (FRBNY) is warning that the problem could get a lot more serious.

By the end of September, the outstanding student loan balance rose by $42 billion and is now totaled at $956 billion.  Nearly half of the increase came from newly issued debt and the other half was due to defaulted student loans that have recently been updated on credit reports in the last quarter.

According to FinAid.org, a website that tracks student loan debt, more than 1.5 million student loan borrowers were in financial hardship deferment, which is usually granted for destitution, such as unemployment, and in forbearance, which borrowers can declare if they cannot afford to pay back the student loan based on their present income.

“The increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position,” said Donghoon Lee, senior economist at the New York Fed, in a media release. “As consumers feel more comfortable, they may start to make purchases that were previously delayed.”

The FRBNY includes forbearance and deferment as part of their calculations.  However, many are concerned as to how students will pay back the debt once the grace period is over.

Although Mark Kantrowitz, the website publisher, told MarketWatch that the United States is far from a student loan crisis, the rate of tuition continues to climb and the average university graduate with a Bachelor’s Degree left school with $28,700 in debt, a figure that is up 31 percent from five years ago.

In total, the FRBNY announced that non-real estate household debt stands at $2.7 trillion as of the third quarter.  The 2.7 percent increase came from the student loan debt, $18 billion in auto loans and $2 billion in credit card balances.

Therefore, the student loan delinquency rate officially surpassed credit card debt for the first time.  However, the FRBNY notes at the bottom of its release that it could be rather misleading because these “these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment or in grace periods and therefore temporarily not in the repayment cycle.”

Economic Collapse News reported in October that the average post-secondary student who graduated school in 2011 left with $26,600 in debt, while research has shown the average debt rate per pupil is between $3,000 and $55,250.

Student loan debt is ineligible to be discharged in bankruptcy, even though most other forms of debt can be.

Those who have argued against Federal Finance Aid (FFA) initiatives say there are various unintended consequences of such a program, including high default rates, soaring tuition and even dwindling graduation rates.

Furthermore, even those who are proponents of such federal intervention measures in education, such as Vice President Joe Biden, have concurred that government student aid has been the culprit for skyrocketing tuition costs – President Barack Obama noted in a State of the Union address, “If you can’t stop tuition from going up, the funding you get from taxpayers will go down.”

“The risk associated with loan obligations are shifted to the taxpayer. Consequently, the act removes obligation and creates a moral hazard with the creation of a virtual backstop,” wrote B.T. Donleavy of the Mises Institute in a 2010 article.  “With the combination of this backstop and decreasing wages because of an oversupply of workers, the result can only perpetuate default. This bursting bubble will be massive and will affect other major industries such as housing, auto, and credit.”

Moody’s economist Cristian deRitis warned earlier this year in an interview with the Wall Street Journal that the future wave of student loan debt defaults could cripple households across the country from accessing credit down the road.

It should be noted, however, that Moody’s issued a report in October that said student loan defaults will remain high throughout 2012, but it will slowly improve, even though the default rate remains twice as high as it was prior to the recession.

Here are some interesting facts about post-secondary education:

–          Since 1978, the cost of college tuition in the U.S. has gone up by 900 percent

–          One-third of college graduates obtain jobs where no college degree is required

–          College students spend half the time studying than students did from a few decades ago

–          Life of a college student: 24 percent sleeping, 51 percent socializing and seven percent studying

–          One-third of college students haven’t taken a class where they had to read more than 40 pages in a week

“The policy of student loans is a total failure.  I mean a trillion dollars of debt that is going to be dumped onto the taxpayer and what have they gotten?  A poorer education and costs that have skyrocketed because of inflation and they don’t have jobs,” stated retiring Texas Republican Congressman Ron Paul in a CNBC Republican primary debate in November.