Despite the growth in household net worth and consumer spending, the student loan debt crisis has been getting worse. According to Morningstar Credit Ratings’ latest report, “State of the U.S. Consumer, Please Sir, Can You Lend Me Some More?” the level of student loan debt grew to $1.261 trillion as of the end of the first quarter, up 5% from a year ago. That’s almost twice the 2.7% increase in household debt.
Moreover, the official delinquency rate for student debt, at 11%, was more than triple the rate for auto loans and could be even higher. The delinquency rate — for loans more than 90 days past due — is closer to 17% if loans in deferment and forbearance — for which payments are postponed due to financial hardship — are included, according to the Morningstar subsidiary.
Student loans, in fact, are the only consumer-related debt sector where delinquencies are higher now than they were during the financial crisis, according to the report. They continue to top all other sectors of consumer debt, including auto loan debt ($1.071 trillion as of the end of the first quarter) and credit card debt ($712 billion).
Much of the increase in student loan delinquencies is from loans that finance attendance at for-profit colleges, which tend to target students who are poorer and older. Until recently, these loans have been easily available to students while the school’s claims of job placement after graduation have been vastly overblown.
According to a Brookings Institution study cited in the Morningstar Credit Ratings report, almost 50% of students who started to repay their student loans in 2011 but defaulted in 2013 were students attending for-profit colleges.
Some of those colleges, such as Corinthian Colleges, have ceased operation while others, including Apollo Education Group’s University of Phoenix, have shuttered many campuses. According to Inside Higher Ed, nearly 100 for-profit colleges ceased operations between 2012 and 2015.
Stephanie Mah, director of research for Structured Finance at Morningstar Credit Ratings, says the rising rate of student loan delinquencies and defaults could slow because of the increased government scrutiny of for-profit colleges. As a result of that scrutiny, the U.S. Department of Education has agreed to forgive $171 million of federal student loan debt owed by former students of the now defunct Corinthian Colleges, and it is considering shutting down the nation’s biggest accreditor of for-profit colleges, the Accrediting Council for Independent Colleges and Schools, for failing to notice the deceptive practices of its schools.
The Department of Education has also instituted the “gainful employment” rule which requires colleges to track the success of graduates in the labor force, and the White House recently proposed a rule that would allow forgiveness of federal student loans in cases of fraud. The rule would also bar any school that accepts federal student loan dollars from forcing students into mandatory arbitration agreements, a common practice among for-profit colleges.
Hillary Clinton, the presumed Democratic presidential candidate, has a plan that includes a three-month moratorium on the repayment of federal student loans, expansion of loan forgiveness and income repayment plans and free tuition at public colleges for in-state residents whose family incomes don’t exceed $125,000.
Her presumed Republican opponent, Donald Trump, whose for-profit Trump University closed in 2010 and is the subject of several lawsuits, including one by New York attorney General Eric Schneiderman who calls it “a fraud from beginning to end,” hasn’t formalized a college funding plan yet. But Trump has said that the federal government should not profit from the student loans it provides, which it does, and federal student loans should not be forgiven.
Morningstar Credit Ratings suggests that the high percentage of federal student loans in deferment or forbearance should be watched closely. The accelerating rate of deferments due to unemployment or economic hardship is a warning to investors of securitized student debt, and the 61% of loans in forbearance due to financial troubles could be a precursor of future defaults, according to the report. “We need to continue to watch the sector,” says Mah.
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