Student Loans Darken Young Adults' Outlook

Investor's Business Daily

Young people with student loans have slashed other debt, but delinquency rates keep climbing as their overall financial situation remains precarious.

Even as the average school-loan balance for 25-year-old borrowers jumped 55% from 2005 to 2012, their total debt actually fell 4% during that time, according to data from the New York Federal Reserve. They've done that by slashing nonstudent debt more than their peers without college loans, buying fewer homes, autos and other purchases.

Yet the share of student-loan borrowers falling behind on repayment has shot up. Among those younger than 30 who are more than 90 days delinquent, the share swelled to 34.9% last year from 21.2% in 2004. Meantime, delinquency on other debt is down.

Why hasn't cutting total debt made it easier to keep up with student loan payments

Have To Live Somewhere

New York Fed senior economist Donghoon Lee points out that most of the decline in non-student debt is from mortgages.

Choosing to rent vs. own lowers overall debt-servicing costs, but it doesn't necessarily lower living expenses. Renters must pay rent.

And rents have gotten pricier as homeownership remains out of reach or less desirable for many.

Real estate site Trulia recently estimated that owning a home is 44% cheaper than renting over time. Surging home prices narrowed that gap just 2 percentage points over the past year. Owning is still cheaper than renting in the country's 100 largest metro areas.

Lee also notes that student-loan borrowers are typically young with little credit history, while other forms of consumer debt go through stricter underwriting.

"Lending standards, such as a required credit score, for mortgages and credit cards became tighter," he said in an email. "But there was no significant change in lending standards for student loans, largely because many of the borrowers don't have established credit.

As a result, the delinquency rate on student debt has worsened and is now the highest among consumer loans, while rates for mortgage, auto and credit card debt are down sharply from 2010.

In Q4 last year, 11.73% of student loan balances were more than 90 days delinquent vs. 10.57% of credit cards balances, 5.58% of mortgages and 4.03% of auto loans.

Nonstudent debt is easier to write off too, Lee adds. That wipes it off credit reports and keeps the delinquency rate lower. But federal student loans are hard to discharge .

Underemployment Degree

Another factor hurting student loan repayment is the job market. Wage growth for college graduates has suffered as the economic recovery staggers along.

From late 2007 to 2012, median weekly earnings for college graduates rose 7.6% nominally, according to Labor Department data. From late 2000 to 2005, it rose 14%.

That includes all college grads, but wages for recent grads are likely worse as many take jobs for which they are overqualified.

A survey by Accenture found that among those with jobs who graduated in 2011 and 2012, 41% were underemployed and working in positions that don't require college degrees.

Dismal job prospects may help explain why more borrowers are putting off repayment, increasingly with encouragement from their colleges. But during that delay, interest accrues on some loans, lifting the balance.

Ready To Double Down?

Yet despite the growing burden of student loans, many recent grads expect to go back to school and take on more debt.

Among those with four-year degrees, 42% see needing a graduate degree to further their careers, according to Accenture. Among those with two-year degrees, 52% expect needing a four-year degree.

But there may be hope. The survey also contained signs that those about to enter the work force are more mindful about employment than recent grads.

Among students graduating this year, 75% considered the availability of jobs in their field when picking majors vs. 62% among those who graduated in 2011 and 2012.

Science, math and technology were the top majors for the class of 2013 vs. social sciences for the earlier graduates.

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