Overdue Student Loans Reach ‘Unsustainable’ 15%, Fair Isaac Says

Overdue Student Loans Reach ‘Unsustainable’ 15%, Fair Isaac Says
A college commencement in Boston. Photographer: John Tlumacki/The Boston Globe via Getty Images

Delinquency rates on student loans made in the past two years stand at 15 percent in the U.S. as recent graduates struggle to find jobs, Fair Isaac Corp. said.

The rate for 2010 through 2012 compares with 12.4 percent for loans made from 2005 to 2007, Fair Isaac’s FICO Labs said in a statement today, citing data from October. Average student-loan debt last year rose to $27,253 from $17,233 in 2005, and almost 60 percent of bank managers surveyed in December expect delinquencies to worsen in six months, FICO said.

“This situation is simply unsustainable and we’re already suffering the consequences,” Andrew Jennings, chief analytics officer of Fair Issac, said in the statement. “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.”

Student loans are the largest source of unsecured consumer debt in the U.S., according to the Consumer Financial Protection Bureau, and the rise in unpaid loans has spurred speculation about a possible bubble. With college costs climbing faster than the rate of inflation over the past four decades, education debt has swelled to $1 trillion, more than what Americans owe on their credit cards.

Subprime Loans

Subprime mortgage delinquencies, which helped trigger a global credit crunch during the last decade, reached 15 percent in the middle of 2007 as the financial crisis gathered momentum.

Fair Isaac is the Minneapolis-based developer of the FICO score, a measurement of consumer credit risk that banks use to decide whether to extend loans and what interest rate to charge.

Loans from banks and other private lenders make up about 15 percent of the outstanding student debt, Mark Kantrowitz, who runs FinAid.org, a website about college grants and loans, said in an interview. The top five private lenders include SLM Corp. or Sallie Mae, Discover Financial Services, PNC Financial Services Group Inc., SunTrust Banks Inc. and Wells Fargo & Co., he said.

Sallie Mae, based in Newark, Delaware, reported on Jan. 16 that loan delinquencies fell to 4.6 percent in the fourth-quarter of 2012 from 4.9 percent the previous year. The lender made $514 million in education loans in the fourth quarter, 12.5 percent more than the previous year, the company said.

Discover, the Riverwoods, Illinois-based credit-card firm that bought a loan portfolio and the Student Loan Corp. business from Citigroup Inc. last year, recorded $7.74 billion of private student debt at the end of November.

SunTrust, based in Atlanta, reported $5.36 billion in guaranteed student loans at the end of 2012, down 26 percent from the previous year.

“You’re starting to see delinquencies pick up and that trend is going to continue,” Michael Tarkan, an analyst at Compass Point Research & Trading in Washington said in an interview. “That’s the reality that we live with in student loans.”

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