Student Loan Bubble Update: "This Situation Is Simply Unsustainable"
Submitted by Tyler Durden
on 01/29/2013 13:49
The last time we looked at the most underreported debt crisis sweeping the land, which is nothing short of the second coming of subprime, namely the student loan bubble, we posted "the scariest chart of the quarter
" in which the Fed had finally caught up with our prior data showing that student loan delinquency had soared to some 11% from the 9% reported in the previous quarter, even as the Fed disclosed it had issued some $42 billion in Federal student loans in the same quarter, and a cumulative $956 billion, a number which as of December 31 is certainly over $1 trillion. This number was lower than the one we had shown previously, or a default rate of some 13.4%
, sourced by the DOE. As it turns out both we and
the Fed were optimistic.
Research by FICO Labs into the growing student lending crisis in the U.S. has found that, as a group, individuals taking out student loans today pose a significantly greater risk of default than those who took out student loans just a few years ago. The situation is compounded by significant growth in the amount of debt that new graduates are carrying.
The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent.
And since there is always a lag between getting the full cohort remittance and delinquency data, the real bad loan percentage is likely in the 20%+ category. So $1 trillion in federal student debt now, 20% delinquency, means $200 billion in loan defaults with zero collateral
. And rising fast.
This is on par with the amount of subprime loans that was expected to end in foreclosure
, yet another number that was vastly optimistic and would have been far worse had the Fed not stepped in to bailout the entire financial system.
And it gets worse. According to FICO:
While the delinquency rate is climbing, the average amount of student loan debt is increasing even faster. In 2005, the average U.S. student loan debt was $17,233. By 2012, it had ballooned to more than $27,253 – an increase of 58 percent in seven years. By contrast, the average credit card balance and the average balance on car loans owed by U.S. consumers actually decreased during the same period.
In a related finding, FICO’s quarterly survey of bank risk managers conducted in December 2012 found that nearly 60 percent of respondents expected delinquencies on student loans to increase over the next six months. The same respondents expected delinquencies on all other types of consumer loans to decrease, putting the pessimism around student loans in sharp relief.
So not only are loans accelerating, but the actual amount of any given loan is rising exponentially.
Some of FICO's scary charts which nobody will pay attention to until it is far too late.
The total percentage of US population with 1 or more student loans has increased from 12.1% in 2005 to 19% in 2012.
The consumer may be deleveraging... in everything but student loans that is: a 58% increase in the average student loan notional in seven years.
And nearly 1% of the population has over $100,000 in student loans!
* * *
FICO's assessment is round in line with outs. "This situation is simply unsustainable and we’re already suffering the consequences
,” said Dr. Andrew Jennings, FICO’s chief analytics officer and head of FICO Labs. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.”