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Citi Global Perspectives and Solutions (Citi GPS) released their “Education: Back to Basics” report on July 17th, and the piece drew a frightening parallel between the current student loan debt situation in the U.S. and the mortgage debt crisis that sparked the Great Recession.
Citi GPS’ report elevated the panic level that surrounds student loan debt in this country after the authors of the study compared that problem to the subprime mortgage crisis of the early 21st century.
“Default and 90-day delinquency rates are about 11%,” according to the Citi report. “To some this might appear eerily reminiscent of the mortgage crisis where delinquency rates had peaked at 11.5% in 2010.”
According to LendEDU, the current default rate on federal student loans is 11.8 percent. Once a student loan borrower is delinquent on their student loans for a certain period of time (typically nine months for federal loans), the student loan lender will declare the educational loan to be in default.
Since 2009, the total outstanding loan debt in the U.S. has nearly doubled to the current total of $1.41 trillion, according to LendEDU. Further, the average student loan borrower leaves college with approximately $28,400 in student loan debt. The total outstanding student loan debt in the U.S. is the second highest form of debt in this country, second only to mortgage debt, which triggered the Financial Crisis of 2007 – 2008.
The current mortgage debt total in the U.S. is $8.63 trillion, quite more than the student loan debt total. According to statistics from the Federal Reserve Bank of New York, 1.7 percent of mortgage balances were delinquent by at least 90 days as of March. In comparison, 11 percent of student loan balances were considered delinquent.
The Citi GPS’ study goes on to say that even though the student loan default rate has dropped from the previous all-time high of 14.7 percent in 2013, the current default rate of 11 percent is still uncomfortably high.
What makes student loan debt unique when compared to mortgage debt is that educational debt is nearly impossible to discharge, even if a borrower declares bankruptcy. Going off of this point, a very small percentage of student loan borrowers will qualify for student loan forgiveness; only non-profit and government employees will be able to have their federal student loans forgiven after they have displayed successful repayment for a period of time. According to a poll conducted by LendEDU, 49.80 percent of college students believed they would be aided by a federal student loan forgiveness program, despite the absence of such a program.
There is also another key difference between the way mortgage debt and student loan debt operate that should give some comfort to those worried about another economic collapse. During the Great Recession, home mortgage loans were packaged together and sold to investors all over the world, otherwise known as securitization.
Securitization extended the reach of the financial crisis. However, student loans are rarely securitized, and when they are, the individual student loans are often low-risk loans that have a high chance of being repaid. In late June, College Ave, a private student loan company, closed their first ever securitization, while SoFi closed their fourth such deal. Another student loan lender, CommonBond, closed a $231 million securitization of refinanced student loans during the same time period.
Author: Andrew Rombach