NY Fed Analysis: Who Borrows for College — and Who Repays?

NY Fed Analysis: Who Borrows for College — and Who Repays?

ABI Bankruptcy Brief

October 10, 2019

ABI Bankruptcy Brief

NY Fed Analysis: Who Borrows for College — and Who Repays?

Student loans neared $1.5 trillion in the second quarter of 2019, a more than fivefold increase since the beginning of 2003, according to a recent New York Fed analysis. The rapid growth was fueled by increases in both the number of borrowers — there are approximately 43 million borrowers in 2019, compared with only 19 million in 2003 — as well as a near tripling of the average balance per borrower, a rise to $33,500 in 2019 from $13,300 in 2003. Although these factors explain the rapid growth of aggregate student debt, there remains a large number of borrowers with smaller balances. The distribution of borrowers by balance reflects this; the median balance among borrowers is just under $18,000. About 33 percent of borrowers have balances below $10,000, and 20 percent of borrowers have a balance of more than $50,000. Only a small percentage — 7 percent, or about 2.9 million borrowers — have a balance of over $100,000. Repayment on student loans has been slow, with high delinquency and default rates. Overall, 15 percent of borrowers in the second quarter of 2019 were 90 or more days past due or in default on a student loan. That share reflects an improvement from 2013, when it peaked at more than 17 percent. In addition to delinquency, other factors contribute to slow repayment patterns, such as more accommodating repayment plans, forbearance and deferment. Tellingly, only about 36 percent of borrowers who were still current on their loans in the second quarter of 2019 had reduced their balances over the past 12 months.

Don't miss the ABI Talk at ABI's 2019 Winter Leadership Conference on "The Rhetoric and Reality of Student Debt," to be delivered by Inez Feltscher Stepman of the Independent Women’s Forum (Washington, D.C.). Ms. Stepman will examine whether there is too much emphasis on reducing student loan debt, including through bankruptcy, and not enough about the real causes of skyrocketing college costs. For more information on WLC and to register, please click here

Employers Try a New Perk: Matching Student Loan Payments with 401(k) Contributions

Many workers with student loans postpone saving for retirement. Now, a handful of companies are trying to prevent them from falling behind on retirement savings by matching their student-loan repayments with contributions to 401(k) plans, the Wall Street Journal reported. In recent months, companies including Abbott Laboratories, Travelers Cos. and Raytheon Co. have either launched or announced plans for such programs. The companies join a growing number of others that are helping workers reduce student debt in other ways, including making direct payments to lenders. Eight percent of the 2,763 employers the Society for Human Resource Management surveyed in April offered assistance with student loans, up from 4 percent in 2018 and 3 percent in 2015. According to a survey of 250 companies last year by the Employee Benefit Research Institute, 11 percent of employers offered student-loan repayment subsidies and another 13 percent planned to add it.

Veterans Affairs Department Refunds $400 Million in Mistaken Home Loan Fees

Veterans Affairs officials have paid out more than $400 million in refunds of home loan funding fees in the wake of an inspector general’s report that tens of thousands of veterans were improperly tagged with extra costs when applying for the loans, the Military Times reported. Department officials said that they reviewed 130,000 cases over the summer to look for errors, which mostly involved simple clerical mistakes or disability ratings changes after veterans settled on their loans. Under existing rules, veterans and service members must pay a VA funding fee when they apply for a VA home loan, which costs anywhere between 0.5 percent and 3.3 percent of total money lent. The money is designed to defray some administration costs for the department, although disabled veterans are exempt from the fee. However, an inspector general report released earlier this year found that at least 53,000 disabled veterans had been charged the fees in recent years. VA officials announced in May that they would review current and past loans, and contact veterans eligible for refunds. In a statement, VA Secretary Robert Wilkie said the effort stretched back as far as 20 years ago. “Our administration prioritized fixing the problems and paid veterans what they were owed.”

Credit Card Delinquencies in U.S. on Rise for Smaller Issuers

Newly released data from the Federal Reserve shows that despite a 50-basis-point decline in the U.S. 10-year note yield since late July, the average interest rate on credit cards continues to hover close to record levels, Bloomberg News reported. The U.S. prime lending rate, the rate that commercial banks charge their most credit-worthy customers, has fallen thanks to easier Fed monetary policy. But the spread between the prime rate and the average annualized rate on credit cards widened to a record level at the end of August, because many issuers have been competing for new customers with richer rewards rather than lower rates. They may also be maintaining this record spread because risks are brewing, underscored by a pick-up in delinquency rates at smaller issuers of cards. Fed data show a growing gap between delinquency rates for the 100 largest banks compared with all others. Delinquent accounts for the largest banks were at 2.44 percent in the second quarter, while other banks saw the rate spike to 6.34 percent from 5.73 percent the prior quarter.

Analysis: Unreadable Fine Print in Leveraged Loans Sparks Market Backlash

Some of the largest investors in the $1.2 trillion market for risky corporate loans say that they’re being given too little time to comb through the hundreds of pages of documents that govern the deals, leaving them exposed to potentially dangerous loopholes, Bloomberg News reported. Now, many are urging the industry’s main trade group to do something about it. GSO Capital Partners, the credit arm of Blackstone Group Inc., is working with roughly a dozen other buy-side firms, as well as underwriters including JPMorgan Chase & Co. and Bank of America Corp., to propose new industry standards. Money managers often have only a day or two to sift through reams of loan documentation before deciding how much to buy — a timetable intentionally set up by borrowers seeking the best possible terms. The pushback follows a number of high-profile transactions in which private-equity sponsors took advantage of weak investor protections to shift assets and cash flow out of reach of creditors, catching them off-guard and fueling bitter clashes. “A 24-hour shot clock is obviously too short of a window to effectively go through these documents,” said Bill Housey, a senior portfolio manager at First Trust Advisors, who is not involved in the discussions. “If assets or collateral can be stripped from lenders through various loopholes, we want to make sure we are paying very close attention upfront.” The GSO-led group, which was created in June as a subcommittee of the Loan Syndications and Trading Association, is discussing a proposal to update guidance that the industry group first issued nearly 15 years ago. The market for leveraged loans has roughly doubled in size over the past decade as investors looking for higher returns piled into riskier debt. Borrowers have been able to chip away at traditional investor protections amid the surging demand for deals. That has left some of the largest private-equity firms in a tug of war with their own credit arms over deal terms.

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New on ABI’s Bankruptcy Blog Exchange: Agencies Sign Off on Final Volcker Rule Changes

The Volcker Rule reforms will result in significant changes to the proprietary trading ban first proposed by former Federal Reserve Chairman Paul Volcker and mandated in the Dodd-Frank Act, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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