Student-Loan Market Recalls Subprime Crisis for U.S. Treasury

The Treasury Department is looking at the rise of American student-loan debt and seeing worrying similarities to the U.S. housing-market bubble.

Deputy Secretary Sarah Bloom Raskin today voiced concern that education-loan borrowers could turn to repayment scams resembling mortgage-payment schemes from 2009 and 2010. Her remarks come a day after a Treasury committee report drew parallels between student-loan default risks and the mortgage market before housing collapsed starting in 2006.

“Millions of student-loan borrowers are in default on their student loans; many more could face default in the near future,” Raskin said today in Tampa, Florida, during her third public speech on student debt since becoming the Treasury’s No. 2 official in March. “I worry about the emergence of a student loan ‘debt relief’ industry.”

High default rates and delinquencies have been a focus for Raskin, in part because they may damage Americans’ creditworthiness and curtail their ability to invest in homes and businesses. They also create uncertainty for the Treasury, which finances about $100 billion of new student loans each year.

“To the extent the government doesn’t get repaid, that boosts Treasury borrowing needs,” Nancy Vanden Houten, a senior government policy analyst at Stone & McCarthy Research in Skillman, New Jersey, said in an e-mail. That is “ultimately a cost to taxpayers.”

Default Rates

About $100 billion of federal student loans are in default, 9 percent of outstanding balances, according to a Treasury Borrowing Advisory Committee update on student lending trends released yesterday.

The balance of student loans outstanding in the U.S. -- also including private loans without government guarantees -- swelled to $1.3 trillion as of the second quarter 2014, based on data released by the Federal Reserve on Oct. 7.

Behind the actual default rate is a “shadow book of potential future defaults, reflected in the volume of loans in deferment and forbearance,” according to the report by TBAC, a group of bond dealers and investors that advises the government on market dynamics. Those would add 23 percentage points to the 9 percent share in default, it said.

The report compares that to the subprime mortgage market.

“Although clearly substantial differences exist, one can look at the rate of serious delinquencies as a percent of the balance of total subprime loans originated leading up to the crisis,” the report states.

Those posted 90-plus-day delinquency rates greater than 30 percent and 40 percent only in mid- to late-2009, suggesting “a 30 to 40 percent threshold as a trigger would be too generous.”

Education Goals

The TBAC report also underlines that many student-loan borrowers fail to earn a college degree.

“A key concern is that students are taking on student loans because historically an education has been correlated with economic mobility,” the report stated. Today an average of 40 percent of students at four-year institutions do not graduate within six years, the report notes, “which means they most likely do not benefit from the income upside from a higher degree yet have the burden of student debt.”

Federal student loans come with choices, such as income-based repayment, that could make paying them off easier, said Katie Buitrago, senior policy analyst with the Woodstock Institute, a Chicago-based nonprofit group focused on fair-lending issues.

“Those options are out there and might reduce the risk for default,” Buitrago said. “There’s a question about how many students are aware of those options.”

Better Servicing

Raskin has been leading a push to find ways to make repayment more affordable. Today she said it’s essential to improve student-loan servicing and the debt collection system to minimize delinquency and default.

The Treasury and Education departments are working with tax preparers Intuit Inc. and H&R Block Inc. to reach borrowers during the tax-filing process and provide information about student-loan repayment options, according to a White House fact sheet issued in June.

There’s good economic reason to ease repayment. Unlike other loans, student borrowing cannot be extinguished in a bankruptcy and borrower’s wages can be garnished to recover money owed. Poor repayment histories could mar a borrower’s credit, Raskin said today.

“Delinquencies are reported to private credit bureaus and can inhibit a borrower’s access to future credit for buying a home, starting a business, or completing or furthering education,” she said.

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