Student loans are going sour at the slowest rate since before the financial crisis as America’s steadily strengthening economy offers more job opportunities to graduates, data from the Federal Reserve Bank of New York shows.
Some 8.8 per cent of up-to-date student loan balances went overdue by 30 days or more in the second quarter, the lowest share since early 2006, the central bank said. While that is still the worst-performing area of consumer credit, it represents a fall from peaks of more than 11 per cent seen in 2013.
Student debt remains a major US policy concern, as individuals struggle to keep up with their commitments and the legacy of indebtedness impairs their ability to buy a home or start a business. Student loans surpassed credit cards in 2012 as having the worst delinquency rates in consumer credit.
The New York Fed’s figures show that outstanding student loan debt stood at $1.41 trillion as of the end of June, well over twice the level 10 years ago. The debt load is greater than the total owed on either credit cards or car loans, while mortgage debt stood at just under $9tn.
$1.4tn vs $586bn
US student debt
June 2018 vs June 2010
The latest statistics suggest graduates’ struggles with debt have been lessened somewhat by the strong labour market. The unemployment rate for graduates with a bachelors degree or higher now stands at just 2.2 per cent in the US, compared with 5.1 per cent for those with less than a high-school degree and 4 per cent for high school graduates who spent no time in college.
“Aggregate household debt grew for the 16th consecutive quarter in the second quarter of 2018,” said Wilbert van der Klaauw, senior vice-president at the New York Fed. “While overall delinquency rates have remained stable at relatively low levels, transition rates into delinquency have fallen noticeably for student debt over the past year, reflecting an improved labour market and increased participation in various income-driven repayment plans.”
Adding to the concerns about student debt is research that suggests the biggest financial problems are often faced by students who can least afford it: poorer Americans who took out smaller loans to pay for courses that sometimes fail to enhance their employment prospects.
Research from the Urban Institute showed this month that borrowers who owe less than $5,000 were more likely than those with higher amounts of debt to default within four years.
A flashpoint in the student loan debate is the high prevalence of repayment problems at corporate-owned, for-profit colleges — run as businesses to make money for owners and shareholders — which have aggressively courted lower-income students.
Politicians from both major parties have repeatedly called for reforms of the system to ease the debt burden, and the Obama administration sought in particular to crack down on the for-profit colleges.
Democrats have accused Education Secretary Betsy DeVos of softening the government’s approach on for-profits, however, for example criticising a proposed rule that would make it tougher for defrauded students to seek debt relief.
Get alerts on Student finance when a new story is published