C&B Notes

From Bad to Worse for Student Loans

Driven by lax (or no) underwriting standards and weaker-than-promised/hoped student outcomes, the fundamentals on the federal government’s student loan portfolio are worsening.  Late last year, the GAO reported the government is on track to “forgive” at least $108 billion in student debt in coming years.  It seems the burden of high higher education costs are shifting to federal tax payers.

Hundreds of thousands have tumbled into delinquency and default.  In the process, many have delayed retirement, put off health expenses and lost portions of Social Security checks and tax refunds to their lender, the federal government.  Student loans made through parents come from an Education Department program called Parent Plus, which has loans outstanding to more than three million Americans.  The problem is the government asks almost nothing about its borrowers’ incomes, existing debts, savings, credit scores or ability to repay.  Then it extends loans that are nearly impossible to extinguish in bankruptcy if borrowers fall on hard times.

As of September 2015, more than 330,000 people, or 11% of borrowers, had gone at least a year without making a payment on a Parent Plus loan, according to the Government Accountability Office.  That exceeds the default rate on U.S. mortgages at the peak of the housing crisis.  More recent Education Department data show another 180,000 of the loans were at least a month delinquent as of May 2016.  “This credit is being extended on terms that specifically, willfully ignore their ability to repay,” says Toby Merrill of Harvard Law School’s Legal Services Center.  “You can’t avoid that we’re targeting high-cost, high-dollar-amount loans to people who we know can’t afford to repay them.”

Parent Plus is one thread in a web of higher education loan programs that have come to resemble the subprime mortgage industry a decade ago, given the shaky quality of many of the loans.  The number of Americans with federal student loans, including through programs for undergraduates, parents and graduate students, grew by 14 million to 42 million in the decade through last year. Overall student debt, most of it issued by the federal government, more than doubled to $1.3 trillion over that period…

Nearly four in 10 student loans — the vast majority of them federal ones — went to borrowers with credit scores below the subprime threshold of 620, indicating they were at the highest risk of defaulting, according to a Wall Street Journal analysis of data from credit-rating firm Equifax Inc.  That figure excludes borrowers, such as many 18-year-old freshmen, who lacked scores because of shallow credit histories.  By comparison, subprime mortgages peaked at nearly 20% of all mortgage originations in 2006.  Roughly eight million Americans owing $137 billion are at least 360 days delinquent on federal student loans, nearly the number of homeowners who lost their homes because of the housing crisis.  More than three million others owing $88 billion have fallen at least a month behind or have been granted temporary reprieves on payments because of financial distress.  New research from Federal Reserve economists shows that most student loan defaults are among borrowers who had weak credit.  Consumer advocates say defaults will continue to mount as loans taken out after the recession enter the repayment cycle.

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