The Student Debt Plague Soon To Hit $1 Trillion

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Have you heard of students in law school and medical school racking up over $100,000 (or much more) in school loan debt?  It is now not that uncommon for students exiting undergraduate school to graduate with student loan debts of $50,000 or higher.  And many of these graduating students have no shot of making more than $10.00 an hour for the time being.  New data from the Federal Reserve Bank of New York is showing that student debt continued to grow and the United States is on its way to having $1 trillion in student loan debt.

The latest Quarterly Report on Household Debt and Credit shows that student loan debt reported on consumer credit reports reached a whopping $904 billion during the first quarter of 2012.  Here is the worst part of it: that was up by $30 billion from the fourth quarter of 2011.  If this 3.4% stays static, student debt will hit $1 trillion by the end of 2012.

There is something else to consider…  Student loan delinquencies are likely to understate actual delinquency rates.  The reason is that almost half of these loans are currently in deferment or in grace periods, which means that they are temporarily not in the repayment cycle. If you use the data provided in March by the New York Fed, it is implied that loans in the repayment cycle have delinquency rates which are roughly twice as high.

The total amount of loans is based on a random sample of people on a national basis from the credit bureau of Equifax Inc. (NYSE: EFX). Fair Isaac Corporation (NYSE: FICO) had a lower figure back in January, but it projected that student loans will be the next casualty of a sluggish economy.  In late May, SLM Corp. (NASDAQ: SLM), or Sallie Mae, reported that the average college graduate who borrows presently faces approximately $25,000 in student debt.

The only good news in the total report is that consumer deleveraging continued as total US indebtedness fell by 0.9% or $100 billion down to $11.44 trillion in the first quarter of 2011.  The peak in household debt was hit in the third quarter of 2008, but since that time the total student loan debt has grown by $293 billion… other forms of debt fell by a total of $1.53 trillion.

The New York Fed showed that the total student loan debt has grown exponentially since 2003 and that growth has been by a whopping $663 billion.  The caveat is that some student loan debt back in 2003 and 2004 may have been undercounted. Student loan debt passed up credit card debt as the second highest form of consumer debt in the second quarter of 2010.

As loan balances are rising, delinquency rates are heading higher as well.  The delinquencies reported as 90+ days delinquent have risen from 6.13% back in the first quarter of 2003 up to 8.69% as of the first quarter of 2012. The peak in the 90+ days delinquent was 9.17% in Q3-2010. These delinquency rates remain higher than that of mortgages, auto loans and home equity lines of credit. Credit card balances were $679 billion, down 21.6% from the $866 billion peak in Q4-2008.  In another ongoing concern, some $1.06 trillion of consumer debt is currently delinquent and of that some $796 billion is listed as ‘seriously delinquent.’

As far as how this $904 billion in Q1-2012 (or a projected $1 trillion after Q4-2012) compares to overall figures, here is what the CIA World Factbook shows for 2011 (projected):

  • GDP was projected at $15.04 trillion
  • GDP per capita was $48,100
  • Government revenues were $2.264 trillion
  • Government expenditures were $3.604 trillion

JON C. OGG