A Third Of $900 Billion In Outstanding Student Loan Debt Held By Subprime Borrowers

As if we needed any more bad news about the already burdensome state of student loan debt in America, a new report says about a third of the almost $900 billion in outstanding student loan debt is held by the riskiest borrowers, the subprime. And another third of those borrowers who are in repayment are 90 days or more past due — quite an uptick from 24% in 2007. This combination of rising numbers of risky borrowers and loans going bad goes to show how the economic crunch is hitting recent graduates.

The Wall Street Journal reports on figures from TransUnion, which shows that the 33% or about $300 billion in debt that’s held by subprime borrowers is an increase from 31% in 2007. And when borrowers turn subprime, they’re less likely people are to pay those debts, says TransUnion’s Vice president.

This reports falls in line with an study from earlier this week on student loan debt, which looked at how debt influences the recent generation’s credit scores, and if anything, makes the negative impact on such scores even more clear. If a third of borrowers are already starting out with lower than average credit scores, getting into debt and subsequently becoming delinquent on those loans isn’t going to improve those scores. Starting out underwater and struggling to break to the surface is a dire scenario.

Perhaps you don’t have a big debt load (or any at all) and you’re thinking, “Why should this bother me?” The more debt a person has, the less likely they might be to spend, which could have a negative impact on the economy, notes a senior director with Moody’s. And if those defaults keep coming, “the taxpayer is going to be on the hook for losses,” he added.

TransUnion’s study was requested by credit unions that make private student loans. While the government has increased its role in student lending, there’s a widening gap between what students can borrow from the feds and the total amount they need to cover costs, which is where private lenders come in.

Overall between 2007 and March 2012, students loans that were 90 days or more delinquent went from 8.8% to 11.4% all while the average student loan balance for a borrower rose by 30% to $23,829.

All in all, things don’t look good, as bank risk managers see these trends leading toward more student-loan delinquencies.

One bright spot is that other kinds of debt like credit cards and mortgages are decreasing, ostensibly making it easier or at least more manageable for borrowers to afford their student loan payments.

Risky Student Debt Is Starting to Sour [Wall Street Journal]