The delinquency rate has doubled in just 4 years, in 2012 alone increasing as fast as at the worst of the 2007-2007 mortgage crisis.
Most Consumer Loan Delinquency Rates Are Falling
After the beginning of 2010, as the economy improved after the Great Recession, less and less people have had trouble paying their mortgages, home equity loans, vehicle loans, and credit cards. The delinquency rate in each of these categories of consumer credit has gone down steadily during this four-year span.
From the 1st quarter of 2010 until the 4th quarter of 2013, the percentage of loans delinquent by 90+ days went down in the following categories:
Home mortgages: 8.9% to 3.9%
Home equity loans: 4.1% to 3.2%
Vehicle loans: 5.0% to 3.2%
Credit cards: 13.7% to 9.5%
Home mortgage and credit card delinquencies have especially come down significantly. The credit card delinquency rate already has reached the relatively low pre-recessionary range of 9-to-10%.
And even the mortgage delinquency rate appears to be on a trajectory heading back towards the pre-recessionary rate of around 1%. The rate had shot up from 0.9% (less than 1%) in mid-2006 to a high of 8.9% at the beginning of 2010—an astoundingly high rate for mortgages. But almost every single quarter since then, the delinquency rate has steadily improved, coming down more than 5% in the last 4 years, and a full 2% in the last year.
Student Loan Delinquencies Are Rapid Rising
It’s a very different story with student loans. The number of student loans seriously delinquent (90+ days late) has nearly doubled—going from about 6% to nearly 12%—during these same four years that the other categories have improved so much.
Think about that. With total student loan balances exceeding $1.1 trillion as of the 1st quarter of 2014, a doubling of the number of delinquent over the span of just four years is huge.
Not only that, but during just one year—2012— the number of delinquent loans went from 8.5% to 11.7%, more than a 3% increase. To put this into perspective, that delinquency rate increase matches what was happening with mortgages during the worst of the housing crash of 2007-2008. That’s when the mortgage delinquency rate went from 1.8% to 7.9% in two years, about a 3% increase per year. And that slammed the U.S. and world economies into the worst recession since the Great Depression.
Comparing Apples and Oranges
But catch this: as scary as the increase in student loan delinquency rate is, likely that rate is actually greatly understated.
Student loans are different from and in many ways more complicated than other kinds of consumer loans. So the published delinquency rate for student loans means something quite different than with other loans.
At its essence, It’s not all that complicated to understand.
With a car loan or mortgage, you’re either current or you’re not. And if you’re not, it’s easy enough to count the number of days you are behind on your payment, and if and when you get 90+ days behind.
But student loans are different. A large majority of student loans—something like 90% of them—are federally backed. And those loans come with benefits that skew the delinquency rate downward in a misleading way.
With most federal student loans the initial payment is deferred until the student graduates from school. Usually then there’s another six-month grace period. These deferred student loans are NOT treated as past due when calculating the delinquency rate, but the balances on those same payment-deferred student loans ARE included in the total balance, resulting in a significant understatement of the delinquency rate.
In other words, millions of student loans that aren’t being paid anything are still counted as non-delinquent for purposed of calculating the delinquency rate.
This DOES get crazily complicated when you start trying to account for other unique aspects of student loans—the many kinds of other payment forbearances and deferments, plus the income-based reduced payment programs, for example.
Fortunately, some highly respect economists at the Federal Reserve Bank of New York have crunched the numbers for us. In a report titled “Grading Student Loans” they estimated that, after adjusting the past due rate calculation to exclude borrowers in grace periods and forbearance, the delinquency rate is actually 21 percent, almost twice as high as the usually published rate.
Their report concludes, in the understated way of economists:
In sum, student loan debt is not just a concern for the young. Parents and the federal government shoulder a substantial part of the postsecondary education bill…. [T]he student loan delinquency picture is not fully captured in the broad statistics since a significant proportion of borrowers and balances are not yet in the repayment cycle.
. . .
Given that student loans are an indispensable tool for educational advancement, this form of debt will remain a critical policy focus for generations to come.
Simply put, the student loan delinquency rate is a lot worse than it looks at first. This is going to cause the federal government and all taxpayers big problems if it’s not addressed effectively and quickly.
