Predicting Student Loan Delinquencies
Posted By Terri Williams on January 14, 2016 at 9:22 am
Student loans account for a large percentage of American debt, even surpassing credit card debt, and second only to mortgages. Cumulatively, student loan debt has passed the $1.1 trillion mark, and the average borrower owes anywhere from $19,000 to $27,000. And the percentage of student loans that are more than 90 days delinquent has increased from 6.7% to 11.7% in the past 10 years.
With such large student loan debt loads and increasing numbers of delinquent accounts, the Federal Reserve Board’s Division of Research & Statistics and Monetary Affairs, recently released a report that identifies factors that can predict student loan delinquencies. By analyzing credit scores provided by TransUnion and other types of information, the report reveals a plethora of interesting information:
Balances and degree attainment
Delinquent borrowers tend to have lower balances than non-delinquent borrowers.
College dropouts were most likely to be delinquent, followed by those with a bachelor’s degree. Graduates with a certificate or associate degree were least likely to have a delinquent student loan.
- 5% of delinquent borrowers did not complete college and had an average balance of $12,524.
- 8% of delinquent borrowers obtained a master’s degree and had an average balance of $48,260.
Delinquent borrowers were more likely to have attended a 4-year public institution. They were least likely to have attended a private for-profit institution.
Students who majored in engineering, mechanic and repair technologies; architecture and construction; criminal justice; computer science; liberal arts; public administration and social work; and communications and journalism were less likely to have delinquent loans.
Students who majored in personal culinary services, and transportation and materials moving had, by far, the highest levels of delinquencies. In 2nd place – but with a significantly lower percentage were business, management, and marketing majors; followed by health professions and related sciences; English, visual and performing arts, philosophy, religion, and theology; biological, biomedical, nature conservation studies, natural sciences, and agriculture.
Regarding previous debt, delinquent borrowers were more likely to have credit card debt, followed by car loans. Delinquent borrowers were more likely to be delinquent on credit card and other types of debt.
Delinquent borrowers were more likely to have established a credit score before leaving school.
Borrowers with credit scores in the 500 to 599 range had a delinquency rate that was 21% higher than those with credit scores in the 680 to 729 range.
Pell Grants are available for low-income students and it is estimated that one-third of students received a Pell Grant.
34.1% of borrowers with a Pell Grant were delinquent on their student loan vs. 14.9% of borrowers who never had a Pell Grant.
The study concludes that students who drop out of school are the most likely to be delinquent on their student loans – perhaps because their job options and corresponding income is limited.
Delinquency rates are high among Pell Grant recipients, but this group is also more likely to include low-income students who – across the board – are more likely to drop out of college.
“There’s an urgent issue that needs to be addressed when it comes to the education system here in America, and that’s in the crippling costs of higher education,” says Fred Schebesta, CEO of finder.com. According to a finder.com survey, dropping out of college was the number one financial regret, especially among those who made less than $50,000 a year. “Think about that – the number-one money regret of citizens of the United States is about something they simply can’t afford,” laments Schebesta.
“If the brightest minds can’t attend college because their family struggles to live paycheck-to-paycheck, yet a millionaire’s son can spend a few years in college – in a drunken stupor, only to drop out in the middle of it all – something just isn’t right,” adds Schebesta. He says that colleges must minimize costs to make college more affordable. This can increase attendance and completion rates while minimizing massive student loan debt loads.