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Student loan bubble looks about ready to burst

Among the problems: A generation of loan default means bad credit, meaning no loans to keep economy pumping.

Brian O'Connell
by Brian O'Connell, MainStreet contributor

You can’t go to Las Vegas and bet on the next great economic bubble bursting, be it FHA mortgages, credit cards or student loans.

But if you could, put your money on that last credit market — student loans.

Data from FICO that analyzes a whopping 10 million consumer credit files show an “ominous” outlook for the college lending market, which is now, according to FICO, larger than credit card and auto loan debt.

Here’s a snapshot of what FICO found:  

READ: Your 7-point strategy for lowering future college costs

Higher default rates. Recent borrowings are at much higher risk of delinquency and default than older loans. The delinquency rate on student loans originated in the three months after October 2005 is 12.4 percent, while the comparable figure for originations in the three months after October 2010 is 15.1 percent — a nearly 22 percent increase. Data show a 47 percent increase in delinquency rate on loans outstanding at the start of each period measured.

Higher debt burden. While outstanding student loan debt has increased significantly in recent years, the average debt burden of student loans has exploded. In 2005, about 12 million consumers had at least two student loans; in 2012, that grew to about 26 million.

Doubled debt. The average graduate's student loan debt has more than doubled from 2005 to 2012, from $17,233 to $27,253.

READ: Post-Grad Reality: Beware of sneaky loan companies

More six-figure debt. The percentage of consumers with student loans of more than $100,000 has quadrupled in the same period

Banks expect more defaults. FICO’s quarterly survey of bank risk managers conducted in December found that nearly 60 percent of respondents expected delinquencies on student loans to increase over the next six months. The same respondents expected delinquencies on all other types of consumer loans to decrease.

That’s where the “ominous” outlook comes into the picture.

“This situation is simply unsustainable and we’re already suffering the consequences,” says Andrew Jennings, FICO’s chief research director. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.”

READ: Big student loans, massive deferral rates

The shockwaves coming from student loan troubles has some far-reaching effects, Jennings says. Lenders and colleges and universities need to step up to the plate before it’s too late.

“As more people default on their student loans, their credit ratings will drop, making it harder for them to access new credit and help grow the economy,” he adds. “Even people who stay current on their student loans are dealing with very large debts, which reduces the money they have available to spend elsewhere. The stakeholders in the student lending industry have to take a hard look at the terms and repayment rules for student loans, and the industry may have to develop a new lending model to prevent a bad situation from getting completely out of hand.”

It’s an uphill climb for an alarming number of college graduates. Worse, the student loan tsunami shows no sign of abating.

Related video

Five key points to know before taking out a student loan


Brian O’Connell has 15 years of experience covering business news and trends, particularly in the financial, health care and career management sectors. He has written 14 books and appeared on CNN, Fox News, CNBC, C-Span, Bloomberg, CBS Radio and other media outlets and in such publications as The Wall Street Journal and The He is a former Wall Street bond trader.