According to a recent article from Bloomberg, the U.S. Department of Education recently released data showing that the number of Americans at least 31 days late on their student loan payments increased slightly (18.8 percent from 18.6 percent) compared to last year. That uptick breaks 12 straight quarters of declines in the delinquency rate. And questions remain as to why more borrowers are having difficulty making their payments on time, considering improvement in the economy, a lower unemployment rate, and increased participation in income-based repayment plans. While an increase in any statistic revealing higher delinquency or default rates is never a good sign, let’s look at the varying explanations for this new data from the best to worst-case scenarios.
There is no reason or explanation
Yelena Shulyatyeva, a senior U.S. economist for Bloomberg Intelligence, suggests “there’s no fundamental reason for that to be happening.” Especially when you look at statistics indicating household incomes and wealth are up, consumers are more confident about their financial situation, and the unemployment rate is lower overall.
The delinquency rate is leveling off
Could the explanation be that after years of declines in the delinquency rate, it is simply leveling off? Matt Sessa, deputy chief operating officer in the Education Department’s student aid unit, recently wrote a public memorandum suggesting just that. Student loans, Sessa notes, are cyclical in nature, and it’s important to compare figures year over year:
“The Portfolio by Delinquency Status reports should not be directly compared with the quarterly performance metrics for federal student loan servicers. These reports define current repayment as less than 31 days delinquent while the most recent contracts with the servicers define current repayment as five days or less delinquent. The servicer contract performance metrics are at the borrower level while the FSA Data Center reports are based at the loan level. As a result, there may be duplication across the FSA Data Center reports in the event a borrower has loans in varying delinquency statuses.”
More borrowers are facing their first monthly payment/High earners removed from the data pool
Michael Tarkan, the director of research at Compass Point Research & Trading, pointed to data showing more borrowers received monthly statements last quarter compared to the previous year because they are leaving school or no longer postponing payment. And borrowers faced with their first monthly statement are more likely to miss them. He also suggests that an increase in companies making new student loans to high-earning Americans with better credit to pay off their student loan debt removes them from the pool—thereby making the federal government’s loan portfolio seem worse.
The most obvious: Americans can’t afford their monthly payments
This last reason raises serious questions about statistical trends for the future. When borrowers end their income-based repayment plans, either by a failure to submit the appropriate paperwork by the deadline or disqualification, borrowers tend to become delinquent on their payments. Whether solely by high payments once borrowers leave school, or borrowers just now coming off lower payment plans, Americans just can’t afford the monthly obligation.
The takeaway, according to loan experts, is this: Even with a growing economy, a greater portion of consumer debts (mortgages, credit cards, and student loans) became delinquent at a faster rate this year compared with last. If you are struggling with student loan debt, or any kind of consumer debt, please don’t hesitate to contact our office nearest you to schedule a free consulta