Banks Write Off $3 Billion in Student Debt Already This Year

US Banks are now starting to feel a real pinch of the student loan crisis as the number of students who default on their debt is skyrocketing. In just the first two months of 2013, banking institutions have had to write off more than $3 billion in student loan debt, a 36% increase over the same period last year.

The data comes courtesy of a report by the credit reporting agency Equifax, which also shows that while part of the increase could be attributed to continuing economic malaise, other factors play a role as well. The borrowing volume is up over the past year as more people secure loans to go back to school to wait out a weak job market and as college tuition continues to grow.

The focus on student loan debt has been intense ever since the announcement by the newly formed U.S. Consumer Financial Protection Bureau in 2011 that the total borrowed amount has surpassed $1 trillion. The pressure is unlikely to ease in the near future, especially since the interest rates charged on federally subsidized Stafford loans are set to double in July.

The cost of earning a 4-year undergraduate degree has gone up by 5.2 percent per year in the last decade, according to the CFPB, forcing more students to take out loans. While other forms of debt went down, student loan debt continued to rise through the economic crisis.

Delinquencies have spiked in the last eight years, with about 17 percent of the nearly 40 million student loan borrowers at least 90 days past due on their repayments, a February report from the New York Federal Reserve Bank showed.

In the past, CFPB has stressed that high levels of student loan debt will have a negative impact on the overall economic health of the country. Delinquencies on student loans are reported to the credit monitoring agencies, and this could keep borrowers from making purchases on credit in the future – including such big ticket items as a car or a house.

To combat this problem, the agency is attempting to introduce a number of oversight measures, including closer monitoring of student loan servicing companies and working with private lenders to rejigger the borrowers’ repayment schedules to allow for more flexibility.

Groups such as the New America Foundation, a nonprofit public policy institute, have said the current student loan repayment system is too complicated for borrowers, and that an income-based repayment system could simplify the process. Some students, they say, simply don’t know how to enroll in the different repayment options or put repayment off to take care of more urgent bills such as credit cards and rent.

03 27, 2013
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