The New York Fed presented a disturbing picture this week of how student loans compare to other household debt.
According to a report New York Fed researchers.
Fed researchers defined severely derogatory debt as any type of delinquent loan combined with a repossession, foreclosure, or write-off. The proportion of debt falling into this category in US households has remained fairly constant over the past four years. But defaulted student loans now account for 35% of that debt.
Auto loans are the only severely delinquent debt type to see the same growth in recent years, but they follow student loans in the severely delinquent loan category.
This trend isn’t entirely shocking, however, said Colleen Campbell, director of post-secondary education at the Center for American Progress.
“Student debt is fundamentally different from other types of debt,” she said.
Because other types of household debt are underwritten — meaning they assess the creditworthiness of borrowers before making a loan — these markets have tightened since the Great Recession. But the federal government has continued to lend to student borrowers at roughly similar rates because student loans operate as an entitlement benefit.
Other key differences separate student debt from other types of household debt. Houses and cars can be repossessed by lenders and the debt cancelled. When a student borrower becomes delinquent, interest on their loan continues to accrue and their balance increases.
The increase in college enrollment during the recession, when many unemployed people sought new skills to increase their chances of employment, also likely contributed to the growth in delinquent and defaulted loans in recent times. years, Campbell said.
“We’re coming to a point now, several years out from the recession, where we’re going to see a spike in default by borrowers from that period,” she said.
Other consumer advocates say defaults on student debt have been exacerbated by failures by actors such as student loan servicers.
“My main reaction to this data is that it confirms what advocates in the student borrowing community have long said: that student debt has reached crisis levels in the United States,” said Alexis Goldstein, senior analyst of the policies at Americans for Financial. Reform.
Unlike mortgages, she said, there is no industry-wide framework at the federal level to regulate student loans. Goldstein said the findings of the New York Fed report underscore the need for state lawmakers to pass student borrower bill of rights legislation.
A growing number of states this year passed legislation adding new oversight of student loan companies, although Education Secretary Betsy DeVos said only the federal government has the power to regulate the student loan program and that the industry says such measures do not address the fundamental challenges with student debt.
Sandy Baum, a nonresident senior fellow at the Urban Institute, said many student borrowers are likely to have other types of loans and would prioritize that debt.
“Until you really analyze who these people are who have other debt, what they owe, what did they spend their money on, I don’t think it makes much sense to say ‘oh my god, it’s student debt that’s the problem,’” she said.