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i grow sude Loa Debimpac Cred Rk?
New research shows that student loan debt hasincreased dramatically and student loans areriskier than beore
As US students incur more student loan debt, lenders and investors in student loans are asking howthis is impacting credit risk and the FICO® Score. FICO conducted research to examine the changesin the credit landscape o student loans since 2005. We quantied the growth o student loan debt,documented the increasing risk o student loans and analyzed shits in general credit risk associatedwith such loans. The headline nding is that consumers opening student loans more recently are generally higherrisk than those in older vintages. This coincides with the act that student loan deault rates are muchgreater today, in both account management and originations validations. Additionally, analysis o millions o credit proles reveals a marked increase in student loan debt. This greater debt and thechallenging labor market or recent graduates will continue to cast a dark cloud over the industry.Our evaluation o credit risk patterns also reveals that high levels o studentloan debt are now riskier than beore. Despite this, the analysis conrmsthat the FICO® Score continues to eectively assess the credit risk o student loans.With the impact o the mortgage meltdown so resh, it is imperative thatthe risk associated with student loan debt continue to be monitored. Asrecent vintages o student loans mature, the combination o lower creditquality at originations, higher debt loads and a challenging labor marketrepresent a problematic conuence o conditions.
Number 65—January 2013
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Key research fndings:
• Student loan debt has increased dramatically.• More recent student loans are riskier thanearlier vintages.• Default rates for student loans have increased.• FICO® Scores continue to eectively assessstudent loan risk.
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Is Growing Student Loan Debt Impacting Credit Risk?
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With the cost o education rapidly outpacing ination, more consumers are taking out studentloans to pay or their education. A recent study by the Federal Reserve in New York nds thatoutstanding student loan debt ($870 billion) is nowgreater than credit card debt ($693 billion) and autoloan debt ($730 billion).
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As shown in Figure 1, our analysis ound that more than6% o US consumers, or approximately 12 million, hadtwo or more open student loans on their credit reportin 2005.
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By 2012, this gure had grown to over 13%,or 26 million consumers. The research was based on alarge data sample rom a US credit reporting agency.Consumers also have a greater amount o student loandebt today. In 2005, consumers with an open studentloan on le had an average student loan debt o $17,233. In 2012, that number increased 58% to $27,253while total debt only increased by 16%, about one-thirdas much. Figure 2 illustrates how much the averagestudent loan debt has increased relative to other debtor consumers with student loans.
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Quantiying the Growtho Student Loan Debt
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by Meta Brown, Andrew Haughwout, Donghoon Lee, Maricar Mabutas and Wilbert vander Klaauw.
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Figures in this paper are based on the population o approximately 200 million US consumers with valid FICO® Scores.
0%60%50%40%30%20%10%70%80%90%100%012+
Figure 1: More People Have Student Loans
87.8%81.2%5.9%5.7%6.2%13.2%
P E R C E N T O F P O P U L A T I O N
October 2005October 2012NUMBER OF OPEN STUDENT LOANS
This bar chart shows the number o open student loans at two points in time. In October 2012,we see a substantial increase in the number o students who have two or more student loans.
Figure 2: Student Loan Debt Has Grown Much Faster Than Other Debt
$5,841$5,828$44,864$5,815$17,233
$4,629$5,729$49,545$5,101$27,253
Student LoanCredit CardMortgageAutoAll Other
2005
AVERAGE DEBT BY CATEGORY
2012
AVERAGE DEBT BY CATEGORY
The pie charts illustrate the breakdown o debt or consumers with at least one open student loan. The average student loan debt has grown rom $17,233 to$27,253. This has outpaced the growth o other orms o debt. Note: not all consumers included hold all other nancial products; or example, $49,545 is theaverage mortgage debt only or student loan holders with a mortgage in 2012.
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Is Growing Student Loan Debt Impacting Credit Risk?
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In addition, the percentage o consumers with student loan debt in excess o $100,000 hasquadrupled between 2005 and 2012, rom 0.2% to 0.8% (see Figure 3). To put this in perspective,there are roughly 1.2 million more consumers with student loan debt in excess o $100,000. The student loan industry has been hit hard in recent years. This is particularly evident rom ananalysis o student loan deault rates.Figure 4 shows the dramaticincrease in student loandelinquencies over the two timeperiods in our study. BetweenOctober 2010 and October 2012,one quarter o student loanswere 90 days past due or worse. This represents a signicantincrease o 47% when comparedto the benchmark October2005–2007 period. Looking atnewly booked student loans,the increase in deault rates wasnot as dramatic, but it was still apronounced 21.5% increase overthe earlier period.
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The Growing Risk o Student Loans
P E R C E N T O F P O P U L A T I O N
12%10%8%6%4%2%0%
Figure 3: Consumers Have More Student Loan Debt
TOTAL BALANCE ON STUDENT LOANS $1–19,999 20,000–39,999 40,000–59,999 60,000–79,999 80,000–99,999 100,000+
9.0%11.0%1.9%4.0%1.7%0.6%0.8%0.3%0.4%0.1%0.2%0.8%
October 2005October 2012
As the chart shows, total balances on student loans have increased. Each time period does not equal 100% because we isolated only consumers with student loans;those without student loans were omitted. For instance, 87.9% o consumers in October 2005 had no student loan.“Account management” evaluates the pool o student loans that were opened prior to the observation date. Forexample, o all student loans opened prior to October 2005, 17.0% o them became 90 days delinquent or worseover the subsequent two years. “Originations” evaluates student loans that were opened within three months aterthe observation date. For example, or all student loans opened within three months ater October 2010, 15.1% o them became 90 days past due or worse during the subsequent 21–23 months.
Figure 4: Student Loan Delinquencies Have Increased
90+ DPD Delinquency Rate
October 2005–2007October 2010–2012% Change
Student Loans—Account Management
17.0%25.1%47.0%
Student Loans—Originations
12.4%15.1%21.5%
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