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Student Loan Delinquencies Reach Record High

Caution sign student loans
Student loan delinquencies reached record highs according to data released yesterday by the Federal Reserve Bank of New York (FRBNY).

The report shows that 11 percent of student loans were 90 days or more past due in the third quarter: a rise from 8.9 percent in the previous quarter. The rate was 8.8 percent a year ago. The current rate is the highest seen since the FRBNY started tracking student loan delinquencies in 2003.

Outstanding student debt currently stands at $956 billion, an increase of $42 billion since last quarter. Of the new $42 billion increase, $23 billion is new student loan debt, while the remaining $19 billion is from previously defaulted loans that have been updated on credit reports during the quarter.

Student loan debt is now more prone to delinquency than credit card debt. After surpassing credit card debt in the middle of 2010, the number of outstanding student debt has increased 42 percent more than the $674 billion in outstanding credit card debt.

Despite this trend, other consumer debts are dropping.

“The increase in mortgage originations, auto loan and credit card balances suggests that consumers are slowly gaining confidence in their financial position,” Donghoon Lee, New York Fed senior economist, said in a release. “As consumers feel more comfortable, they may start to make purchases that were previously delayed.”

According to the report, delinquency rates on outstanding consumer debt fell to 8.9 percent in the third quarter, a drop from 10 percent the previous year.

Mortgage debt is currently at $8.03 trillion: the lowest figure since 2006. Additionally, mortgage delinquencies decreased from 6.3 percent to 5.9 percent.

The FRBNY report is compiled from national representative samples, randomly drawn from Equifax credit report data. The calculations count borrowers in forbearance or deferment as being current on their loans. Once the payment periods are over, a new influx of delinquencies can occur. The Fed predicts that the real delinquency rate in the current cycle is “roughly twice as high.”

According to FinAid.org, experts say that student loan debt must increase significantly in order for a real economic crisis to occur. The two-year default rate on federal student loans would need to triple.

Unlike credit cards, where losses usually fall on private lenders, federal student debt is usually placed on taxpayers' backs. And the burden is only set to grow with the implementation of income-based repayment. This relatively new plan allows students to pay between 10 to 15 percent of their discretionary income to repay loan debts.