In newly released data, the U.S. Treasury Borrowing Advisory Committee says student loan balances and default rates have increased since they last reported on the market in 2012, with the federal government now representing more than 85 percent of student loan origination volume.
The student loan data is part of Treasury’s fiscal year 2014 Q4 Report and provides an update on student loan trends, including the growth in outstanding student loan balances from $1 trillion in 2011 to $1.3 trillion as of the second quarter of 2014.
Estimates from the Congressional Budget Office (CBO) indicate that the four largest federal student loan programs will further grow by $1.2 trillion from FY 2015 through FY 2024. And while the program, as currently designed, is expected to yield $135 billion in taxpayer savings in the next decade, CBO also expects it to cost $88 billion. Treasury notes that about 76 percent of federal student loans are originated with no credit underwriting.
According to Treasury, there are four factors that continue to drive growth in federal student borrowing, which has increased from 33 percent in 2002 to 48 percent in 2012. To begin with, reduced state subsidies for in-state schools and the increased enrollment across the board — and especially at for-profit institutions —have “broadened the use of student financing,” the report notes.
Students are also staying in school longer. Forty percent of students at four-year institutions and 68 percent of students at for-profit schools are not graduating within six years.
Further, the weak economy and shifts in student demographics caused by the growth of the 20- to 34-year-old cohort could be reasons for the increase in completion time. This is concerning because these students accumulate more debt and likely are not benefiting from the increased income a higher degree usually secures but still have student debt to pay, Treasury notes in the report.
And finally, the slower-than-anticipated decline of student loan balances has also contributed to the growth in the student loan market, as there has been a greater volume of loans in deferral and in increase in the length of loan tenors. Since the 2012 TBAC report, two-year cohort default rates have increased from 8.8 percent to 10 percent, with nearly $100 billion in defaults owned by 7 million borrowers representing 9 percent of outstanding federal student loans. The average amount in default is $14,100 per borrower.
A hint at possible defaults lies in the increasing volume of loans 90 days or more delinquent, according to Treasury, which notes that delinquency rates for student loans are the “highest among any consumer debt product.” The volume of loans in deferment and forbearance adds 23 percent to the 9 percent already listed in default, bringing the total number to 31.8 percent.
Though there are many concerns surrounding the growth of student loan borrowing and issues with repayment, Treasury states in the report that it is “premature to conclude the extent to which student lending is crowding out other forms of credit creation and thus action as a drag on other parts of the economy.”
Publication Date: 12/16/2014