It’s no secret that America has a $1.3 trillion student debt problem and as we’ve outlined on a few occasions recently, the actual delinquency rate for student borrowers is far higher than the (also high) 18% that’s generally reported because as The St. Louis Fed recently pointed out, it’s important to look not at delinquencies over total student loans but at delinquencies over loans in repayment and when you do the math on the latter you discover that once America’s best and brightest come out of deferment and forbearance, one in three quickly fall 30 days or more behind on their payments. In other words, the real delinquency rate (i.e. the rate for those who are actually required to make payments) is closer to 30%.
And while the Obama administration debates [8] more “efficient” ways to allow for the discharge of this mountainous pile of bad loans in bankruptcy proceedings, some folks saw their student debt ABS put on review [9] for downgrade at Moody’s which cites default risk on nearly $3 billion worth of paper. As a reminder, these are the deals and tranches affected:
[10]
With all of this in mind, the St. Louis Fed is out with still more evidence [11] that the trend in student loan delinquencies is getting more worrisome by the year. Here’s more:
The Great Recession affected households in different ways, including causing people to get behind in debt payments. Student loan payments were no exception. The figures below show student loan delinquencies in the fourth quarters of 2007 (the beginning of the recession), 2010 (after the recession) and 2014 (the most recent data available). We used the fourth quarter of each year to avoid changes that may be related to the time of year.
The first figure represents a usually quoted rate of delinquency in student loans: the percent of people with student loans who are behind in their payments.
[12]
And while we already knew that, what we did not know (but probably could have surmised had we been asked) is this:
To further study student loan delinquency, the figure below shows student loan borrowers making payments late who are behind by 90 days or less. Thus, this figure represents the percent of delinquent borrowers who are not seriously delinquent.
[13]
As the figure shows, that rate remained relatively flat during the crisis, suggesting that households would stop making payments for a couple of months during the recession, then restart. During the past four years, this rate worsened significantly, dropping from 12.4 percent to 8.6 percent.
The two figures taken together suggest that although student loan delinquency has slowed over the past four years, its quality has worsened because more borrowers have become seriously delinquent.
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In other words, not only are delinquency rates on the rise, so too apparently, is the percentage of delinquent borrowers who have simply stopped making payments, late or not. It's no wonder then, that we're starting to see ABS tranches at risk for not being paid down by maturity.
