U.S. Student Loan ABS Defaults Normalize in 2Q22

U.S. Student Loan ABS Defaults Normalize in 2Q22

8 min read


The number of student loan borrower defaults has been steadily declining since peaking at $13.8 billion in the second quarter of 2017, reaching $9.8 billion in the first quarter of 2018. But in the second quarter of 2018, default rates started rising again, hitting $11.8 billion. By early 2019, total student loan defaults had reached $11.9 billion, according to data released today by the U.S. Department of Education’s (ED) Office of Federal Student Aid.

In contrast, total repayments to ED increased each quarter for four years running, rising from $15.5 billion in 2016 to $16.8 billion in 2017 and to $17.9 billion in Q1 2018 before falling back down to $18.3 billion in the second quarter.

As repayment rates increase, we expect defaults to rise once again, potentially returning to their precrisis peak levels. In fact, if current trends continue, it appears that more than half of borrowers who start repaying their loans in 2021 may end up defaulting.

However, we don’t think we’ll reach that level until after 2026. After all, even though interest rates on federal education loans are low right now, they’re likely to be much higher later this decade than they were during previous recessions.

The good news is that defaults tend to fall off sharply after the recession ends. And while student debt remains high, defaults remain relatively rare. As a result, the average amount owed on the loans held by borrowers hasn’t changed much over the past few decades — about $27,000 per borrower. However, the proportion of people owing more than $40,000 has grown considerably, especially among younger Americans.

We’ve included some charts below to help illustrate our point. First, here are two graphs showing how total borrower defaults have evolved over time:

And here’s a chart showing how defaults compare to repayments over time (this shows only borrowers who began repaying in the last three years):

Finally, here’s a chart showing the share of borrowers whose payments exceed 90% of their income:

As we noted earlier, student loan defaults peaked during the financial crisis and fell following its close. Since then, they’ve begun slowly climbing again, driven by rising delinquency rates and rising unemployment. The uptick in October was largely due to seasonal factors. We estimate that defaults should return to their historical lows sometime around 2022.

But we don’t anticipate defaults to climb dramatically until after 2024. That’s because delinquencies are still extremely low, especially among young adults. On average, just 4% of borrowers with loans aged 25 to 34 were delinquent in 2015. And even those borrowers are unlikely to default soon. Their delinquency rate peaked at 13% in the third quarter of 2013.

Meanwhile, the delinquency rate for older borrowers has risen slightly since 2014. It currently stands at 5%, compared to a peak of 6% in the third quarter.

In short, we believe defaults will begin to pick up again sometime around 2024. But it could take several years to get back to where we were in 2008.

U.S. Student Loan ABS Defaults Normalize in 2Q22

ABS defaults are expected to normalize due to low unemployment and high stock market valuations. However, higher interest rates could bring about further deterioration in loan performance. A slight improvement in credit quality should continue, while risk premiums are likely to increase. While banks may not reduce their loan portfolios immediately, they should start reducing loans gradually over time. In fact, after years of securitization, we expect to see some lenders characterizing their portfolio. Banks will still have access to the capital markets, but without the benefit of being able to sell loans at a discount to par value.

U.S. student loan ABS defaults normalized in 2Q22.

The number of student loan ABS defaults has been steadily rising since the second quarter of 2016. In fact, the number of defaults has risen over 50% since the first quarter of 2017. From Q1’17 to Q2’17, the total number of newly reported defaults rose from 18,000 to 29,000. However, those numbers aren’t even close to being accurate since they only include loans sold before April 17th, 2017. The true number of newly reported defaults could actually be twice as high due to the fact that not all borrowers who defaulted before that date were able to file their default status with the Department of Education. Thus, the real number of newly reported defaults remains unknown. Despite this, the rising trend does suggest that many students are facing financial difficulties. And while some may blame these developments on a lack of job prospects, others argue that these trends reflect a bigger problem—namely, the government’s inability to control its own lending practices.

Rising Interest Rates Are Hurting Homeownership

Higher interest rates cause homeowners to pay higher monthly mortgage payments, which means that fewer people are buying homes, thereby reducing demand for housing inventory. Higher prices make home ownership less affordable for buyers, which further restricts housing supply. As a result, we are likely to continue to see higher interest rates throughout 2018.

Tax Reform: What Is Next?

President Trump signed off on major tax reform legislation late last year, which was expected to save American taxpayers around $1 trillion dollars over 10 years. While the legislation didn’t get much attention at the time, the details of the bill are still coming out. One particular detail that caught our eye was an amendment that would allow individuals to deduct state and local taxes (SALT) from their federal income tax liability. By contrast, current laws only permit deductions for property taxes and income taxes paid to states and municipalities.

Economic News: The unemployment rate has dropped to 4.6 percent.

Unemployment claims dropped for the fourth straight week to the lowest level since 1969. Economists had predicted that the Labor Department would report a slight increase in unemployment claims, but instead, the data showed a decrease. This suggests that businesses did not raise hiring levels as anticipated. Indeed, employers added just 40,000 jobs to payrolls in September, compared to the 200,000 expected. However, wages grew strongly, strongly suggesting that workers received wage gains. Since January, wages have increased by 3%.

The Fed’s Jackson Hole Conference

At the annual meeting of the Federal Reserve’s policymakers in Wyoming, Chair Janet Yellen said she expects economic activity to pick up after several months of slow growth. She also urged Congress to enact fiscal stimulus measures to boost business investment and employment. “I think it’s fair to say that the economy’s recovery is proceeding slowly,” Yellen noted. The Fed chair added that the labor market appears to be strengthening and that inflation should rise closer to the central bank’s target rate over time. Nevertheless, Fed officials left open the possibility of increasing interest rates if the economy continues to improve rapidly.

U.S. Student Loan ABS Defaults Normalize in 2Q22

U.S. student loan defaults rose sharply last quarter, according to Fitch Ratings data released Thursday. Default rates were at 8.1% at the end of November, down slightly from 8.2% at the end of September. That’s the lowest level since the first three months of 2012, when the rate was 6.8%. A year ago, the default rate stood at 10.9%, its highest point since 2011. Over the past few years, student loan debt has risen dramatically. In 2009, the typical borrower owed $9,300; now, borrowers owe about $26,000. As a share of household income, student loans have grown from 4.0% in 2006 to 9.1% in 2015, according to the Federal Reserve Bank of New York.

Most people who borrow money from banks and credit unions in order to finance their education end up paying off those debts. But not everyone does. According to the Consumer Financial Protection Bureau (CFPB), some students take out federal student loans and then use them to pay for things like rent, groceries, and utilities — not college tuition. Such side payments aren’t counted toward the loan balance, so these “hidden” debt obligations don’t appear on a borrower’s monthly statement. And unlike traditional student loans, they may be hard to track. The CFPB estimates that tens of thousands of Americans carry hundreds of thousands of dollars in hidden debt.

A study published earlier this month by the Brookings Institution found that between 1992 and 2005, the percentage of bachelor’s degree recipients who took private student loans dropped from 60 percent to 44 percent. At the same time, the proportion of public-school graduates increased from 26% to 36%.About 30 million people hold student loans today, totaling almost $1 trillion in outstanding balances.

If you want to make sure you qualify for a particular job or promotion, look for a company that encourages outside learning opportunities. Companies that encourage employees to develop skills in fields unrelated to corporate work are seen as more innovative than companies that focus solely on internal training.

If I had to do it again, I would just go back to school, get my bachelor’s degree, and start working right away. There’s no need to have both a bachelor’s degree and a master’s degree if you already have your bachelor’s degree. Just go back to school! ” West, Kim Kardashian

New York, surpassing credit card debt for the first time. At the end of September 2017, the outstanding balance stood at nearly $1.59 trillion, according to the Consumer Finance Protection Bureau. In June 2018, the bureau reported that more than 1 million borrowers had defaulted and their loans were now considered delinquent.

More students drop out amid rising college costs.

According to data released Thursday by the National Center for Education Statistics, the number of students who dropped out of school last year increased for the third straight year, hitting a record high of 9.8 percent in fall 2017. That’s about 663,000 people who left without earning their diplomas. About 577,000 of them did not enroll again after leaving college, and around 86,000 people stopped attending high school altogether.

Rising income inequality fuels student loan woes.

After years of steady improvement, income inequality has worsened among Americans under 35 years of age, fueling higher rates of student loan delinquency and default. A study published Tuesday by the Urban Institute finds that the share of millennials with incomes below $25,000 fell from 56% in 2005 to 45% in 2015, while those with incomes between $50,000 and $75,000 grew from 26% to 32%.

Defaults rise despite government aid.

Student loan borrowers continue to struggle even as the federal government steps up its efforts to help troubled borrowers repay their debts. According to data released Tuesday by the Department of Education, nearly half a million borrowers ended 2017 with a payment default on their federal student loans. Those numbers have remained relatively stable over the past five years, following a brief decline due to the economic downturn. But they remain well above levels seen before 2008, making the situation worse for taxpayers.

What happens if I default?

If you don’t make payments on your student loans, what happens? If you’re late, you’ll likely face penalties and interest charges. And if you go beyond 90 days, you could be charged fees and sued for repayment.

Why do student loans get forgiven?

Many factors determine whether a borrower will qualify for forgiveness. Borrowers may need to prove hardship, show good behavior, or pursue certain career paths. There’s no clear way to predict how much money will be wiped off your student loans.

How many people have been affected by the coronavirus outbreak?

The United States saw more than 300,000 cases of COVID-19 infections and more than 13,000 deaths as of Wednesday afternoon. According to the White House Coronavirus Task Force, almost 70,000 people were tested for the virus, and more than 4,600 patients received positive results.

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