Why Delinquent Student Loans Are The Fuse In America’s Next Debt Bomb – Quartz

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The chart above is from this week’s New York Federal Reserve quarterly american credit report, which offered mostly good news: overall household debt remains below the 2008 peak and default rates have improved overall. But there is one asset class where default rates and borrowing are both rising: student loans for higher education. These are also the only debt that continued to rise during the recession, tripled between 2004 and 2012.

There are now more people in the United States who borrow money to pay for their education than to pay for cars or credit cards. What’s more disturbing? Some 17% of borrowers are in arrears on their loans, up from 10% in 2004. And that’s not even the actual default rate, since it’s the percentage among all borrowers, including those who are still studies and therefore do not yet repay their debt. If you subtract them from the total, the default rate rises to 30%.

The reasons are clear: higher education gives students a greater chance of prosperity, making it a sought after commodity. But its cost far exceeded inflation. People increasingly need a graduate degree to be competitive, so they spend more time in school and out of the workplace. And student debt laws are stricter than other types of consumer credit, making it difficult to discharge the obligation in the event of bankruptcy.

But the consequences are only beginning to be felt. The first is that people burdened with student debt spend less on other things, cannot get credit for other purposes, including mortgages, and often fall behind on debt other than school. they contract. Another is that the more debt you have to go into to get an education, the more the system becomes unfairly rigged in favor of the better-off. But also consider this report from the Wall Street Journal:

[T]America’s largest student lender known as Sallie Mae sold $1.1 billion in asset-backed securities backed by private student loans on Wednesday, attracting nearly 15 times the demand required to sell the largest tranche. risky, people familiar with the deal said. It was the first time since before the financial crisis that Sallie Mae had chosen to sell the riskiest part of a bid, having held onto it in previous deals.

Although the loans in this transaction may be of high quality, demand for the higher-risk tranche suggests that investors seeking higher returns are interested in securitized student loans. Which means they’re looking for returns in vehicles backed by the single category of consumer credit where non-payment on time is on the rise.

Ultimately, this is a problem with the higher education cost, and a combination of competition, government regulation, technological disruption, and rethinking what people really want from the experience. But while everything is being figured out, President Barack Obama is trying to force colleges to be more transparent about how their graduates are employed, by providing more information to borrowers. And Congress could take a step to allow the cancellation of student loan debt in the event of bankruptcy. This would at least help ease the pressure on those whose expensive degrees do not allow them to get the jobs they were hoping for.

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