Students are carrying more debt than ever before. From 2005 to 2012, the average student debt load increased by more than $10,000 – from $17,233 to $27,253. That’s a 58% increase in seven years.
Default rates are also on the rise. Students taking out loans today are far more likely to default than they were only a few years ago.
According to FICO’s review of 10 million consumer credit files last year, the delinquency rate for student loans originated from 2010 to 2012 is 15.1% compared to 12.4% for loans taken out between 2005 and 2007, representing a 22% growth rate.
During the same time period credit card debt and car loans decreased, according to the FICO report. Student loans, however, show no signs of slowing down
Student loans may impact credit ratings
The chief analytics officer at FICO, Dr. Andrew Jennings, warns that students who default on their loans are risking their financial futures by compromising their credit ratings. He says that even borrowers who keep current on loan payments will have trouble taking out other lines of credit, since they will be carrying a heavy debt load already.
Jennings says that new standards and regulations may need to be put in place to safeguard borrowers from financial ruin down the road. He says that the industry may need to take a hard look at the terms for student loans, and “may have to develop a new lending model to prevent a bad situation from getting completely out of hand.”
Bank managers pessimistic
Another FICO survey from December 2012 found that bank risk managers expect the default trend to continue. Almost 60% of those surveyed said that student loan delinquencies would likely increase over the next six months. That quarterly report surveyed 251 bank risk managers across the United States.