How bad is America's student loan situation? According to recent data from the New York Federal Reserve, our $1.38 trillion in outstanding student loan debt is second only to mortgage debt but comes with a higher delinquency rate.
As of the end of 2017, approximately 1.3% of mortgage balances were delinquent by ninety or more days. With student loans, the delinquency rate is a startling 11% – and that figure understates the problem. Almost half of existing student debt is not in the repayment stage because the borrowers are still in school, in deferment, or otherwise exempted.
In essence, one out of every five students that are in the student loan payment stage has not made a payment in three months or more.
A closer look at the New York Fed data reveals a disturbing trend. Prior to the Great Recession, credit card delinquency rates were consistently higher than any other form of debt delinquency. During the recession, credit card and mortgage delinquencies increased sharply, reaching a peak in 2010. Delinquency rates for other forms of debt (student loans, home equity lines of credit, and auto loans) were at relative highs as well.
During 2011 and 2012 the trends diverged. Student loan delinquency rose sharply while other forms of debt delinquency declined. Student loan delinquency rates overtook credit card delinquency rates in 2012 and they remain approximately 3% higher. Auto loan delinquencies are at 4.1% while defaults on HELOCs and mortgages remain well below 2%.
How do you avoid joining the delinquent student loan holders? If you're in the repayment period, superior budgeting and cutting expenses is critical. Income-based repayment plans through the Department of Education are also an option to acquire lower payments (assuming they survive reform efforts by the Trump administration).
For student loan debtors that aren't in repayment yet, a proactive approach to overall debt is the way to go.
If you're still in school, consider the advice of Millennial Money Expert Stefanie O'Connell – "Making a list of what you owe, to whom, how much, what the interest rate is ... can you afford those payments? Do you need to contact your lender to try to negotiate better terms?" By creating an expected budget at or near graduation, you can spot trouble areas and address them early.
There's one catch in that approach – what's your estimated income? If you don't have any job offers, research the average salaries in your chosen field and where you want to live. Cut that by 10%-20% to allow for the worst case.
If you are just starting your higher education, think about how far your future salary will go compared to the expected debt. Adam Carroll, Founder and Chief Education Officer of National Financial Educators, suggests that lenders take the same approach. "We need to make borrowing commensurate with what starting salaries are in that major," Carroll says, noting that you can borrow the same amount whether you are getting an engineering degree or an education degree.
Essentially, Carroll is suggesting that since the student loan program does not assess the risk of repayment, you have to do it yourself. Follow that advice and look for any and all scholarship opportunities that apply, and you are less likely to become another unpleasant student loan statistic.
Look at your education in terms of return on investment instead of four years of fun. You can have four years of fun almost anywhere you go to college, but can you pay your bills after you're done?
Find out quickly at what rate you can refinance your student loan.