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Troubling Spike in Student Loan Write-Offs

The dramatic rise in student loan volume is a worrisome trend for policymakers, but perhaps a more troubling one for banks is a big spike in write-offs (see chart 1).

Between January and August of last year, lenders wrote off $13.6 billion in student loan debt, a 46 percent increase from the same period of 2012 and the highest amount for this period in any of the last eight years, according to the data from Equifax (See chart 2).

The credit bureau's tally of write-offs includes both private and federal student loans, and is the sum of loans that either have been sent to collections or belong to people who have filed for bankruptcy. Federally insured loans are rarely written off, but must be adjusted if the borrower cannot repay; lenders typically write off the portion by which a loan has been reduced only at the end of the loan's amortization period, usually 20 years.

The surge in write-offs comes as more banks shut down their student loan operations, generally because of a lack of profit resulting from changes to the federal program.

"Federal loans are now about 90 percent of new loans," says Amy Crews Cutts, Equifax's chief economist. "Much like in the mortgage market, federal money has crowded out private money."

Just three lenders account for 75 percent of the originations in private student loans, according to Standard & Poor's. Sallie Mae dominates the business, with 51 percent market share, by its own estimate, followed by Wells Fargo and Discover Financial Services.

For banks that do student lending, it tends to account for a tiny portion of overall lending. Wells' $22.4 billion in student loans amounts to 1.5 percent of total assets. When JPMorgan Chase quit the business last summer, its $11 billion of student loans equaled less than 0.5 percent of total assets.

The jump in write-offs is a sign that what has been called a mounting student debt crisis has begun to hurt lenders.

Total student loan debt passed $1.2 trillion in July, according to the latest data from the Consumer Financial Protection Bureau, making it the second-largest of all the types of debt that Americans hold, behind home mortgages. The bureau estimates that more than $1 trillion of the student loan debt is guaranteed by the federal government. It also says that roughly 40 million Americans have student loans, and owe an average of $30,000 each. (For a snapshot of loan amounts per borrower each year, see chart 4.)

A recent increase in delinquent balances tracks with the increase in overall volume of student loans (see chart 5), Cutts said. Though the dollar amount of the delinquencies is up (see chart 6), student loans 60 or more days overdue have stayed at about 6 percent to 8 percent of total student loans for the past eight years (see chart 1). Meanwhile, in same period, total student loan debt has ballooned.

But the stubbornly high rate of student loan delinquencies contrasts with other types of loans. Delinquency rates for both auto loans and bank cards have been falling and are back to pre-recession levels.

What's going on with student loan debt doesn't bode well, especially since well-paying jobs remain elusive, says Cutts. The unemployment rate for 20- through 24-year-olds was 12.5 percent as of October, compared with 7.3 percent for U.S. workers overall. In addition, real wages for young college graduates dropped by 5.4 percent between 2000 and 2011, according to a CFPB analysis. "It is simply hard for these young people to pay," Cutts says.

The sharp increase in write-offs might be due in part to banks' recent tightening of forbearance policies, says Deanne Loonin, a lawyer with the National Consumer Law Center and the director of its Student Loan Borrower Assistance Project. Though private lenders are not legally required to adjust their loans, many have forbearance policies under which distressed borrowers are given relief, which makes it possible to avoid write-offs at least temporarily, Loonin says. But recently, "the regulators have made it clear that extended forbearances were a problem."

In July, the Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and the Federal Reserve rejected a request by private lenders for more leeway in working out delinquent loans. The CFPB has shown more willingness than other regulators to encourage borrower relief. But it remains "extremely difficult" for borrowers to get free of student debt, Loonin says, just as it is becoming more difficult for banks to rework loans, or, increasingly, to compete in the market at all.

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