Student Loan Debt Delinquency the Latest Reason to Act

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In February, the Federal Reserve Bank of New York released its quarterly report on household debt, finding that total household debt surpassed $14 trillion for the first time. However, it was another metric that has economists sounding the alarm.

The report found that, as of the fourth quarter of 2019, 9.2 percent of student loan debt is considered in “serious delinquency,” a term used for debt that is 90 days or more overdue. This is a continuation of a troubling trend stemming from the Q3 report, and according to the authors of the report, is likely significantly understating the true number of delinquencies because about half of student loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle, and not included in the delinquency statistics above.

Compared to credit card debt (5.16 percent), auto loan debt (2.34 percent) and mortgage debt (0.99 percent) – the nearly double-digit percentage of student loan debt delinquency should be of grave concern to everyone in the country. Record student debt, which has shot up past $1.6 trillion, combined with skyrocketing delinquency rates, is simply unsustainable.

A wider context is critical to understanding the nature of this problem. Juxtaposed with an economy with a great jobs market, along with record low unemployment, the trend seems to be inexplicable – and experts agree. New York Fed Senior Vice President Wilbert Van Der Klaauw shared a few of his thoughts on the issue, noting: “When the economy is strong you would typically not expect delinquency increases unless they are changing the lending standards,” he said in an interview after the report’s release.

While individuals like Mr. Van Der Klaauw recognize the devastating impact of rampant student debt, it is imperative that lawmakers also heed the warning, and then take action by implementing policies to help alleviate this crisis. We have been watching this trend at Freedom for the past several years as our 2,500 employees work hand-in-hand with consumers to help them manage their debts and regain their financial footing.

The macroeconomic trends reported by the New York Fed cannot be explained away by financial irresponsibility. All you have to do to reject this notion is talk to impacted people directly, something we have been doing for nearly two decades. Debt results from a myriad of factors. It could be due to an illness, a divorce, a death in the family, a lost job, or sometimes all of the above.  Having worked with hundreds of thousands of customers over the years, one thing is very clear: the individuals who are choosing to run up their debts in order to take advantage of the system are extraordinarily rare.

For many Americans, student loan debt represents by far the most significant component of their personal balance sheet.  And when did they start making the decisions about this most significant financial decision?  For many, it was when they were only 18 years old, with little to no financial education or understanding.  They incurred this debt to go to schools that continue to increase tuition faster than inflation year after year.  And these schools are able to pay for their excesses with debt lent from the government to their students – while the schools take absolutely none of the risk of non-payment.  That risk lies with the US government (and ultimately the taxpayer).  The risk also lies with the students who wind up overburdened with debt even before they embark on their careers, which ultimately impacts the career decisions and risks they are able to take. 

At Freedom, we have begun a scholarship program to help some students avoid the worst, but others must take action to reverse the pain our student loan debt borrowers are experiencing. If student loan debt balances and delinquencies continue to rise at this rate, we are setting up an entire generation for failure. Leaders including those in the private sector and in politics cannot afford to idly sit back and let this continue, I know we won’t.

Andrew Housser co-founded Freedom Financial Network in 2002 and Bills.com in 2005. Andrew sits on the board of directors of several startup companies as well as two independent school boards.