Todd Vermilyea, the senior associate director of banking supervision and regulation at the Federal Reserve, said the rising costs of higher education, increasing student loan debt and high employment levels have contributed to an increase in student loan delinquencies.
Since 2007, student loan debt has nearly doubled from $550 billion to more than $1 trillion. Student loan balances have outpaced other consumer credit products, except for mortgages.
The average balance per borrower also increased from $15,000 in 2004 to reach just under $25,000 last year, likely the result of a number of factors, including increased enrollment in post-secondary school, a decline in household wealth, more attractive terms on government-guaranteed loans and the rising cost of education.
Government-guaranteed loans comprise approximately 85 percent of all student loan debt, while private loans represent just 15 percent of all outstanding student loan debt. Last year, new government-guaranteed student loan originations exceeded $105 billion—about 93 percent of all new loans.
“The Federal Reserve has no direct role in setting the terms of, or supervising, the student loan programs,” Vermilyea said in testimony prepared in advance of a Senate committee hearing on private student loans. “The Department of Education is responsible for administering the various federal student loan programs, which, as noted earlier, comprise about 85 percent of the student loan market. The Federal Reserve does, however, have a window into the student loan market through our supervisory role over some of the banking organizations that participate in the market. Federal Reserve supervision of participants in the student loan market is similar to our supervision of other retail credit markets and products. Institutions subject to Federal Reserve supervision–including those with significant student loan portfolios–are subject to on-site examinations that evaluate the institution’s risk-management practices, including the institution’s adherence to sound underwriting standards, timely recognition of loan deterioration, and appropriate loan loss provisioning, as well as (to a limited degree) compliance with consumer protection standards.”
Vermilyea said the Federal Reserve also oversees the student loan market with the Comprehensive Capital Analysis and Review. Last year, the CCAR showed banks submitting student loan data held more than $63 billion in government-guaranteed and private student loans, of which $23.6 billion represented private student loans. The CCAR showed that while just over four percent of private student loans were delinquent, more than 21 percent of government-guaranteed student loans were delinquent.
“Borrowers who are delinquent on student debt may face difficulty obtaining other forms of credit,” Vermilyea said. “Further, student loan delinquency is also associated with higher delinquency rates on other types of debt. More than 15 percent of delinquent student loan borrowers also have delinquent auto loans, 35 percent have delinquent credit card debt and just over 25 percent are delinquent on mortgage payments.”
Additionally, Vermilyea said higher education plays “an important role in improving the skill level of American workers.”
“Due to increasing enrollment and the rising cost of higher education, student loans play an important role in financing higher education,” Vermilyea said. “The rapidly increasing burden of student debt underscores the important of the topic of today’s hearing.”