Dark Clouds Looming Over Student Loan Industry
My earlier blog post quantified some of the trends we have been seeing in the US student loan industry, namely the precipitous increase in student loan debt. Our ongoing analysis has found another disturbing trend: recent vintages of student loans have noticeably lower FICO® Scores than earlier vintages.
This chart illustrates the score distribution trend for consumers who have recently opened a new student loan. Here we see a clear shift toward lower scores. In fact, the median score has dropped 17 points from 659 to 641.
These findings indicate that in recent years, student loan lenders have made student loans available to more consumers with lower credit quality. Since private student loan lenders were exiting the market at about this time, the shift seems to indicate that public student loan lenders have funded higher education at the expense of deteriorating credit quality.
In fact, we observed a bad rate of 15.1% for the vintage of student loans opened within the three months following October 2010. Five years earlier, the bad rate was 12.4% for the vintage of student loans opened within the three months following October 2005. So in just five years, the bad rate had increased by 23.3%.
These results are problematic given the long payment term of student loans, the larger student loan balance carried by consumers today, and the challenging labor market that recent graduates have encountered. If lenders are seeing a noticeably higher delinquency rate on student loans within their first 23 months or so, it may not be an aberration. It may be the first trickle of a looming gully-washer for the industry.
These results are consistent with findings from our quarterly survey of US bank risk management professionals. In fact, in our latest survey, a majority of respondents (59%) expected delinquencies on student loans to continue to rise. It was the fifth consecutive quarter that respondents predicted a worsening of student loan delinquencies. Interestingly, most respondents expected delinquencies on every other type of consumer loan to hold steady or decrease, underscoring the highly targeted concern of lenders when it comes to student loans.
If you'd like to learn more about our student loan research, I invite you to read my just-published Insights white paper, “Is Growing Student Loan Debt Impacting Credit Risk?" (#65; registration required for download). We will continue to monitor this industry and share findings here.