Subprime is Back…. in Student Loans « Market Montage

This is going to be a LONG simmering story but stories continue to pile up on the growing disaster that is the student debt bubble.  Which of course is leading to the tuition bubble.  For a quick primer, things the U.S. government tends to subsidize (with good intention) tend to spike in price far in excess of income growth.  The obvious candidates are healthcare and tuition which have increasingly detached from what people can afford out of pocket.  We can argue the Fed is now subsidizing housing (again) but that's an issue for another day.   For all the talk about healthcare, tuition has far outpaced it on an inflation basis.  Here is a chart from a few years back.  

And it's only accelerating as the federal government (much like the in the mortgage market) has taken over almost the entire lending market.   Of course there are solutions now – for example one of the more prominent is the plan to let students pay 10% of income out of pocket (capped) and then default forgive the rest of their loan after 20 years.  Of course that money does not come from money heaven – its a cost to taxpayer but I suppose in this day and age it will just get piled into the category of "cost of doing business" and we can stick it on the Fed balance sheet.    That is why it is important for the federal government to take over the market – it can make unilateral decisions like this without involving the banks as was the issue with the mortgage market.   Of course this is going to lead to perverse behavior but since we never learn from our past, all we can do is talk about these things and note them.  Student default rates are surging even as student loan debt outstanding has now passed credit card debt in the country.  But when you give out loans of increasing size to people with little credit history (or bad credit history) with challenging job prospects – this is generally how it is going to end up!

The WSJ has a piece out today on the growth in subprime loans… in the student loan market.  An interesting read indeed.  It looks like "walking away" from all sort of debt is now becoming a learned behavior, although student debt is a *tad* harder to sneak away from versus say a mortgage.

  • The number of student loans held by subprime borrowers is growing, and more of those loans are souring, the latest signs that a weak job market and rising debt loads are squeezing recent graduates.  In all, 33% of all subprime student loans in repayment were 90 days or more past due in March 2012, up from 24% in 2007, according to a Wednesday report by TransUnion LLC.
  • Meanwhile, the Chicago-based credit bureau found that 33% of the almost $900 billion in outstanding student loans was held by subprime, or the riskiest, borrowers as of March 2012, up from 31% in 2007.
  • The high debt loads could weigh on consumer spending and the economy, said Cristian de Ritis, a senior director with Moody'sAnalytics, a unit of Moody's Corp. If the defaults continue to increase, "the taxpayer is going to be on the hook for losses," he added.
  • The federal government has taken a more active role in student lending and now makes about 93% of all loans.
  • Another study, released by Fitch Ratings  warned that the gap between college costs and what students can borrow under the federal student-loan program will continue to widen.
  • In the five years through last March, the portion of all student loans that were 90 days or more delinquent rose to 11.4% from 8.8%, while the average student- loan balance per borrower increased 30% to $23,829, TransUnion found.
  • Another study, released Tuesday by credit-score provider Fair Isaac Corp.found that roughly 26 million consumers had two or more open student loans on their credit report in October 2012, up from about 12 million in 2005. A majority of bank risk managers expect student-loan delinquencies to continue to rise, according to Fair Isaac.
  • Stafford loans, which account for more than three-fourths of federal student loans, impose no credit standards and are capped at a total of $57,500 for undergraduates. Ruben Medrano, a 52-year-old undergraduate studying business management at Texas A&M University-San Antonio, said taking out about $26,000 in federal student loans was much easier than taking out an auto loan or a mortgage. "The last vehicle we purchased, we spent four to five hours in the dealership," Mr. Medrano said. "The student-loan process took me 30 to 45 minutes and I never had to leave my home."

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