A number of factors are now combining to create significant stress in the student loan market, driven mostly by growing balances, a tough job market and greater availability of credit to less-qualified borrowers. Now experts predict a surge in late payments on these accounts.
Between October 2005 and the same month in 2010, the credit of borrowers who were seeking education financing declined, as the median credit score for student loan recipients slipped to 641 from 659, according to a report from the credit scoring giant FICO. The rate at which debts were extended to those with bad credit expanded some 23.3 percent during this time, rising to 15.1 percent of all such loans from just 12.4 percent.
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Experts say that the slowly rising numbers for delinquency and default on student loans in the first two years or so after they come due, an emerging trend within the past several months, could be an indicator of a massive shift in the industry, rather than an aberration, the report said. Roughly 59 percent of respondents to a recent poll of bank risk management workers said they expect to see student loan delinquencies continue to rise, marking the fifth straight quarter a majority has felt this way.
And that actually stands in stark contrast to their thoughts on other types of loans, the report said. The majority expect delinquencies on lines of credit including mortgages, home equity, credit cards, auto financing, and small business loans to either hold steady or decline in the next six months, but this is not the case for student loans. Only slightly more than 10 percent of those polled felt that there would be declines in that category.
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Many college students are now leaving school with tens of thousands of dollars in outstanding debts spread across not only their student loans, but their credit cards as well. This can make it incredibly difficult for young people who are just entering an already-tough job market to meet all their monthly obligations and stay current. Further, many who have private student loans in addition to those issued by the federal government may face even more difficulties because the former category tends to carry much harsher repayment rules.