Federal Reserve Bank of St. Louis

   In the third quarter of 2012, the share of delinquent student loan balances exceeded the share of delinquent credit card balances, according to the Federal Reserve Bank of New York’s Consumer Credit Panel and to Equifax. This is the first such occurrence since 2003, when reliable data became available. In the fourth quarter of 2012, the share of delinquent student loan balances continued to rise. With U.S. student loan debt estimated at close to $1 trillion, the surge in delinquent student loan balances has brought increased attention from analysts and policymakers. In addition, the persistently high U.S. unemployment rate - now 7.5 percent - fuels growing concern that fewer full-time employment opportunities could trigger a wave of student loan delinquencies, providing yet another shock to the U.S. economy. This article explores the reasons behind the growing student loan debt and delinquency rate in the United States.

The Growing Student Loan Debt and Delinquency Rate

   Student loan debt increased significantly over the past few years, almost doubling from half a trillion dollars in 2007 to nearly $1 trillion today. After mortgage debt, it is the largest amount of debt held by U.S. consumers. In contrast, the amount of auto loan and credit card debt held by U.S. consumers today is approximately $783 billion and $679 billion, respectively. The substantial growth in student loans is likely due to an increase in the number of borrowers as well as the amount of debt incurred per borrower. From 2005 to 2012, the number of borrowers increased from 24.3 million to 37.5 million (a 54 percent increase) and average debt per borrower increased from $16,000 to $25,000 (a 56 percent increase). The median debt per borrower in 2012, however, was much lower—$14,100. Overall, 39.1 percent of borrowers in the fourth quarter of 2012 had less than $10,000 in student debt. In other words, the average debt level is skewed by a small percentage of borrowers with a large amount of debt: 3.6 percent borrow more than $100,000, likely for expensive degrees, for example, in medicine or law.
   Since the height of the financial crisis, the delinquency rate for student loans has also grown. Delinquency rates for other loan types, however, have either declined or held steady. In the fourth quarter of 2012, 11.7 percent of student loan balances were delinquent for 90 days or more, up from 11 percent in the third quarter. Due to a unique accounting treatment used in calculating student loan delinquency rates, researchers at the Federal Reserve Bank of New York suggest that the high delinquency rates may actually be understated. They found that nearly half of all student loan borrowers are either in a deferral or a forbearance period. By removing deferred loans from the sample and focusing on only those loans in an actual repayment cycle, the researchers were able to show that the delinquency rate on student loans is actually more than double what is currently reported.

Reasons for High Levels of Student Debt

   While stagnant household income is generally seen as a significant contributor to recent increases in student loan borrowing, research also suggests that high levels of student debt are correlated with higher tuition and fees. From 1993 to 2011, education costs increased 165 percent. In comparison, during the same period, broad inflation was 56 percent and medical care costs increased approximately 100 percent. According to College Board data, the national average for tuition and fees for the 2012-13 academic year is $8,655 for (in-state) public four-year universities and $29,056 for private, nonprofit, four-year universities, increases of 4.8 percent and 4.2 percent, respectively, over the previous academic year. Both increases are consistent with the rising tuition trend observed over the past several years, although the current pace is slower.

Why Are Tuition and Fees Rising So Fast?

   Several factors point to why the percentage increase in tuition and fees is outpacing the broad inflation rate. First, years of state funding cuts may have led public universities to raise tuition. It appears that when states cut education funding, tuition and fees at public universities increased more dramatically.
   Second, the “Baumol effect,” or “Baumol’s cost disease,” named after economist William Baumol, explains that some industries, such as education, cannot easily increase productivity. For example, the average teacher-to-student ratio in college today is about what it was 30 years ago. Instructors today, however, while not necessarily more productive than they were in, say, 1980, are paid higher salaries after adjusting for inflation. Universities, therefore, must either raise prices or seek more subsidies from the government to cover the increased costs.
   Third, the federal government’s involvement in providing financial aid to students may have led to unchecked growth in college costs. Some critics have drawn a parallel between student loan debt and subprime mortgage debt. They believe that a college education, like homeownership before the financial crisis, is increasingly viewed as a social good - but one that could quickly become a liability. And the maximum federal loan amount available to students continues to increase, underpinning fear of the size of the potential liability: As of 2012, dependent undergraduate students can borrow up to $31,000; independent undergraduate students up to $57,500; graduate students up to $138,500; and students in certain health-professional programs up to $224,000.
   Finally, universities compete with each other for students through increased spending on infrastructure, management and instructors. Using data provided by the University of Minnesota, the Wall Street Journal recently reported that, from 2001 to 2012, the university’s management payroll expenses increased 45.5 percent, outpacing the 15.5 percent increase in its teaching payroll and 22.4 percent increase in student enrollment. This phenomenon is not unique to the University of Minnesota. As long as students are able to borrow more each year, universities can continue to increase tuition, making them less likely to rein in spending.

Reasons Behind the High Delinquency Rate

   Research shows a correlation between student loan delinquency rates and the health of the labor market and suggests that the former is unlikely to improve until the latter significantly improves. Research also highlights that delinquency rates are significantly higher for students who attend private, for-profit colleges. Students at private, for-profit colleges account for about 10 percent of the nation’s college enrollment but, according to the Dept. of Education, account for nearly half of all student loan defaults. This fact has led some to argue that for-profit schools abuse federal loan programs to increase student enrollment, and thus increase revenue, by using questionable recruitment practices and misleading potential students about the true costs of their education and actual graduation and job placement success rates.
   In response to concerns about for-profit schools, on June 2, 2011, the DOE published new “gainful employment” regulations. These regulations stipulate that in order to receive federal student loans a program must lead to gainful employment, which is determined by the program meeting one of the following three criteria: 1) at least 35 percent of former students are paying down the principal on their loans; 2) the annual loan payment does not exceed 30 percent of a typical graduate’s discretionary income; or 3) the annual loan payment does not exceed 12 percent of a typical graduate’s total income. The regulations apply to most career colleges, including the majority of for-profit schools and certificate programs at nonprofit schools and public schools. On June 30, 2012, however, a federal judge found that the DOE didn’t provide a good rationale to support the 35 percent threshold, and the gainful employment regulations were put on hold.


   The delinquency rate on student loans has surged in recent months. Given that the number of student loans and the overall amount of student loan debt have ballooned in recent years, student loans represent a potentially severe problem for the United States. Because the vast majority of these loans are backed by the U.S. government, they represent a huge potential liability for U.S. taxpayers. As household incomes continue to stagnate and education costs continue to greatly outpace inflation, the amount of student loan debt will likely only increase. With high unemployment and a weak labor market, it is likely that the delinquency rate on student loans will also continue to increase. In the absence of a strong economy, students, particularly those with heavy student loan debt, are more likely to delay the purchase of a home or car and family formation, thus reducing overall consumption growth in the U.S. economy. While the overall impact of such a shift is difficult to determine, it’s likely that another economic shock to the U.S. economy would further increase the delinquency rates on student debt nationwide.
   Emily Dai is an economist and member of the Supervisory Policy and Risk Analysis Team at the Federal Reserve Bank of St. Louis.