Student loan debt: the next time bomb?

    Today's graduates hit job market with more debt, fewer prospects
By Tony Mecia
 While consumers have paid down credit card balances and other debts in recent years, there's one area where they continue to borrow heavily: student loans.
    People affected by growing student loan debt are sounding alarms, and no wonder. Look at the numbers. According to data from the Federal Reserve:
    Student loan balances now stand at about $870 billion, an amount that has surpassed total credit card balances ($693 billion) and total auto loan balances ($730 billion).
    The average outstanding student loan balance per borrower is $23,300.
    About 37 million Americans owe money on student loans.
    Almost 10 percent of student loans -- $85 billion worth -- are delinquent, and the Feds fear that number may be understated.
     Student loan debt: the next time bomb? The Occupy Wall Street movement rallied last year around "immediate across-the-board forgiveness" of student debt. The National Association of Consumer Bankruptcy Attorneys says student loans could be "the next debt bomb" for the U.S. economy. Even Federal Reserve Chairman Ben Bernanke -- whose son expects to graduate from medical school with $400,000 in debt -- says student lending requires "careful oversight."
    The growing interest in student debt comes as delinquency and default rates are on the rise, and as total debt figures blow past big milestones. In 2011, student loan debt surpassed credit card debt. In 2012, total student loan debt is expected to hit $1 trillion for the first time.

Lots of student debt, few jobs
That explosion of student debt springs from economic trends: College costs are rising fast and college enrollment is hitting new highs, but students are graduating into a tough job market that makes student loan repayment even tougher. A study by the John J. Heldrich Center for Workforce Development at Rutgers University in 2011 showed that of college students who graduated in 2010, only 56 percent had found a job a year later.

"What you have is a whole generation of young people who are beginning their post-academic lives under a debt burden that Americans have never experienced in the past," says Alan Nasser, a political economy professor at Evergreen State College in Washington.

Although the concept of escalating debt that's tough to repay might sound similar to the subprime mortgage crisis that preceded the 2008 recession, experts say there's little chance that ballooning student loan debt will lead to a similar financial meltdown. That's because more than 85 percent of student loans are backed by the federal government, which has more power than private lenders to force repayment.

Instead, the effects of rising debt are felt individually, by borrowers overwhelmed with the amounts they're compelled to repay. Experts say high debt inhibits consumer spending, discourages further education and creates a disincentive to marry and start families.

"It prevents a lot of people from moving on with their futures, which is bad for productivity and bad for our economy," says Deanne Loonin, an attorney with the National Consumer Law Center, an advocacy group for low-income Americans.

The old trade-off: student debt for skills
Of course, the idea behind student loans is to allow students to pursue degrees, which typically lead to higher incomes. Because of that, many students view them as a worthwhile investment.
Student loan debt: the next time bomb?

Elisabeth Podair, 25, says it was "scary" to sign loan documents when she was an undergraduate at Queens University of Charlotte, N.C., but that it was the only option after winning scholarships to pay for much of her expenses at the small liberal arts school. When she graduated in 2009, she owed $20,000, but felt as though the university prepared her well for the workforce. She landed a job soon after graduation as an account executive at an advertising and marketing agency in Charlotte.

Podair has started paying down the balance to a mix of federal and private lenders. She says she'd prefer to have no debt, but that if she has to have some, educational debt is better to have compared with, say, a car loan, since the value of a car declines with age.

"I hope that the value of my education will only increase over time, and the amount I owe will only decrease over time," she says.

Podair says she owes less than many of her peers.

Nationally, two-thirds of bachelor's degree recipients take out loans to pay for college, according to the College Board. Of those who borrow, the median amount owed at graduation is $20,000. The top 10 percent of borrowers owed $44,500 or more. Graduate students typically borrow more than undergraduates.

For borrowers who are simply unable to pay, there's a complicating factor: College debt is difficult to erase -- more so than credit card debts or even gambling debts. For federally guaranteed loans, which account for more than 80 percent of all student lending, the balances are almost impossible to wipe away, even in bankruptcy. In addition, the government has collection powers unavailable to private lenders, such as intercepting tax refunds and even reducing Social Security benefits.

Students don't always understand loan terms
Experts say consumers need better understanding of the loans when they take them out, as well as their options if they're unable to repay them.

Young adults, for instance, might not realize the effects of carrying tens of thousands of dollars of loan debt.

"Young people, when they're 18 or 19, they're not thinking straight. They don't have much experience with debt," says Allen Carlson, president of the Howard Center for Family, Religion and Society, who has studied the effect of loan debt on families. "They hear what the education establishment tells them, which is, 'This is your ticket to a rich future.'"

The easy availability of student loans -- which are typically made irrespective of a borrower's credit or career choice -- result in a workforce that is "overeducated," Carlson says. So while skilled machinists are in short supply, "we probably have too many lawyers, too many art historians and too many sociologists," he says.

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Mortgages Paying on Time

     FEWER homeowners have been falling behind on their mortgage payments over the last two years, yet even with the improvement, a significant number still are delinquent or in foreclosure.
Related
    Being in such a predicament almost always proves costly for borrowers — both in terms of fees they will owe and the lower credit rating that will result.
      Mortgage delinquencies are “about halfway back to long-term prerecession levels,” said Jay Brinkmann, the chief economist for the Mortgage Bankers Association, in its fourth-quarter delinquency report, which was released last month. Some 7.58 percent of all residential loans were delinquent at the end of 2011, down from a 10 percent high in 2010 but well above the 5 percent prerecession average. All together, 12.63 percent — one in eight homeowners — were in trouble or in foreclosure at the end of the year, the association reported.
      Meanwhile a separate report last month, from the credit-reporting agency TransUnion, found that delinquency rates fell to 6.01 percent in the fourth quarter of 2011 from 6.4 percent the same period the year before, though they rose slightly from the third quarter. Delinquencies of 60 days or more are expected to rise again in the first quarter of 2012, then decline the rest of the year, said David Blumberg, a TransUnion spokesman.
       With so many homeowners still pinched financially, it is crucial to understand and adhere to payment deadlines. In general, payments are due on the first of the month; many lenders, though, allow a 15-day grace period. That means “not written by, not posted by, but received by the servicer” on that day, said Michael McHugh, the president of Continental Home Loans in Melville, N.Y., and the president of the Empire State Mortgage Bankers Association. In scheduling automatic electronic payments, he advised, allow at least “five days’ leeway.”
      If the payment arrives even a day past the grace period,  your lender will very likely charge a late fee of  2 to 5 percent of the monthly payment, Mr. McHugh said. The late fee and timing are spelled out in mortgage documents. Some late fees may be waived, especially if you have a history of on-time payment.
     What is less often waived is the nick to the credit score. At 30 days tardy, a lender sends the credit bureaus a report, which is immediately transferred to your credit report, said Rod Griffin, the director of consumer and public education at Experian, another credit-reporting bureau. The black mark stays on the books seven years, he said, unless successfully challenged.
    “That late payment on a mortgage is going to have a significant negative effect on your credit score,” Mr. Griffin said.

Research last year by FICO, the provider of one of the most popular credit scores used by lenders, showed a 60- to 110-point drop in scores for being 30 days late, with the biggest reduction to those with the highest starting score of 780. It could take nine months to three years for the FICO score to recover fully, the research indicated.

VantageScore, a rival to FICO, estimates that the initial hit would be 60 to 100 points at 30 days delinquent and another 10 to 20 points at 60 days.

The key, the experts say, is to pay up before you are 30 days behind — or, failing that, to keep the payments no more than 120 days delinquent to avoid foreclosure proceedings and many extra costs, they say. “If they can stay between 90 and 120 days’ delinquency,” said Carol Yopp, the manager of the foreclosure program at the Long Island Housing Partnership, “they typically don’t get referred for foreclosure.”

Ms. Yopp, who also has 16 years’ experience as a mortgage underwriter, notes that many lenders will not take partial payments on mortgages; they will hold them in a “suspend account” until the borrower has the full amount. Still, she suggested homeowners make a partial payment anyway, so they’re not tempted to use the earmarked funds elsewhere.

What is CREDIT?

          Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately (thereby generating a         debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a        later date. The resources provided may be financial (e.g. granting a loan), or they may consist of goods or            services (e.g. consumer credit). Credit encompasses any form of deferred payment. Credit is extended by a          creditor, also known as a lender, to a debtor, also known as a borrower.       Credit does not necessarily require money. The credit concept can be applied in barter economies as well, based on the direct exchange of goods and services (Ingham 2004 p.12-19). However, in modern societies credit is usually denominated by a unit of account. Unlike money, credit itself cannot act as a unit of account.

        Movements of financial capital are normally dependent on either credit or equity transfers. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. Credit is also traded in financial markets. The purest form is the credit default swap market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this risk – the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced, while the protection "buyer" pays this premium and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

        Credit, in commerce and finance, term used to denote transactions involving the transfer of money or other property on promise of repayment, usually at a fixed future date. The transferor thereby becomes a creditor, and the transfer, a debtor; hence credit and debt are simply terms describing the same operation viewed from opposite standpoints. 
            
     

BUCKS; Card Shuffling and Credit Score

 Do you have a chunk of credit-card debt that you keep bouncing from card to card to take advantage of an attractive balance transfer offer? Or have you opened new credit card accounts just so that you can collect extra miles or some other enticing bonus?

     If so, you might be curious about how all of this factors into your credit score. In a few words: it's probably not helping, but not for the reason you may think.

A reader who said he had debt in the ''low five-figures'' recently wrote to us about this issue. He was under the impression that the FICO credit scoring gods look kindly upon accounts that you've held for a long time -- and he's right about that. So his question was this: Will it hurt my score if I close an account shortly after the introductory interest rate expires, say, after a year or two?

     The answer: The account closures might hurt his score, but not simply because he's closing a new account, said John Ulzheimer, president of consumer education at SmartCredit.com. In fact, one of the biggest myths about credit scoring is that closing an account will stunt the aging process. Instead, ''you still get the value of the age of the account whether it's open or closed, active or inactive, balance or no balance,'' he said. The account continues to age, even after it is closed.

     In our reader's case, he already did damage by merely opening up a new account because every new credit inquiry, which happens when you open a new card, could affect your score.

Still, closing the account may still chip at his score some more, especially if it had a sizeable credit limit. That's because FICO scores are helped by the amount of unused credit you have available, and the more of it you have the better. (This is known as your credit utilization rate. FICO considers how maxed out each of your individual cards is, as well as the total amount of debt and sees how that compares with your total available credit.)

     Keeping the account open is likely to help those numbers (though if it has a hefty annual fee, you need to take that into consideration, especially if that money would be better spent paying down debt and you don't plan on making any major credit-dependent purchase in the immediate future).

''It's a math game,'' Mr. Ulzheimer added, ''How much open and available credit do you have compared to your balance?''

People with the highest credit scores, or scores above 760 -- on a scale of 300 to 850 -- are typically using less than 10 percent of their available credit at any given time, he added.

The bottom line: if the card has a high annual fee, or you simply want to keep things simple and cancel it, go right ahead. Just be aware that it may affect your credit utilization rate, which could hurt your score. Also, one other important thing to note: Those closed accounts are eliminated from your credit report after they have been closed for 10 years. So, at that point, the account closure could ultimately dent your score if your other accounts are much newer.

But the biggest problem for serial balance transfer surfers, or those who continually open new cards, is that they are perpetually adding new accounts. That brings down the average age of all of your accounts.

This is a more complete version of the story than the one that appeared in print.

PHOTO: Closing credit card accounts could lower a user's credit rating. (PHOTOGRAPH BY DANIEL ROSENBAUM FOR THE NEW YORK TIMES)

MORTGAGES; A Co-Borrower's Credit Issues

CORRECTION APPENDED IN most cases it is easier to qualify for a home mortgage by applying with another person -- be it a spouse or partner, or even a close friend or sibling. But problems may arise if the other person's credit score is less than stellar.
    The federal agencies that oversee and buy mortgages from lenders, like Fannie Mae and Freddie Mac, require lenders making conventional loans to focus on the lower of the two FICO scores. (Scores generally range from 300 to 850, with the national median at 711, according to FICO.)
But both scores may be factored into other loans. On a jumbo loan, for instance, the lender is likely to ''put more weight on the credit score of the person with the higher income,'' said Greg Gwizdz, an executive vice president of Wells Fargo Home Mortgage in Somerville, N.J.
For some people, however, it may be necessary to hold off on a home purchase for a few months to allow the co-borrower with credit issues to clean up his or her report and raise the score.
      This can be done by being ''hypervigilant on paying your bills on time'' for at least a year, said Tracy Becker, the president of North Shore Advisory, a credit restoration company in Tarrytown, N.Y., or by perusing the credit report and correcting any inaccuracies.
Ms. Becker says that one way to raise a FICO score by 30 to 40 points in a few months is to be added as an authorized user to a well-established person's credit card, even if you don't use the card. Your score can rise, too, if you pay down credit-card balances so they are at least 10 percent of the maximum credit limit.
Even if you cannot afford to pay down the cards that far, it can help even to reduce the balance to, say, 60 percent of the limit, said Joanne Gaskin, the director of product management global scoring at FICO. The closer your balance is to the credit limit, the more the score will increase when the balance is paid down.
If the cards are ''maxed out,'' Ms. Gaskin said, ''that's going to be very negative.''
       Preparation is key, Ms. Becker said, suggesting that both parties review their credit reports and scores together early on in the home-search process.
Alexander Arader, the owner of Arader & Associates, a mortgage broker in Stamford, Conn., said that a borrower with a credit score of 620 to 640 could pay as much as one percentage point more in interest than a borrower with good credit, say around 760 or higher.
''Do whatever it takes to get your credit score up,'' he said.
If there is little time for a significant upgrade in a credit score -- perhaps because you found your dream home and can't wait to make an offer -- borrowers should explain to the lender any issues that might have affected the credit report, said Mr. Gwizdz of Wells Fargo.
''Take time to tell your story,'' he said, and make sure you carefully document any major life issues that might have contributed to a score's decline, like an illness, divorce or job loss.
The borrowers also need to make it clear why a second person is on the mortgage, especially if that person is not living in the house, he said. A parent helping a child buy his first apartment in Manhattan will have less trouble explaining the connection than a friend who isn't there full-time, he said.
Sometimes it may make more sense to have just one person on the mortgage -- provided, of course, that the person can afford the monthly payments alone. Some banks may allow two people to appear on the property's deed with only one on the mortgage note.
While the FICO credit score is important, it is only one part of what lenders evaluate in the application process, Mr. Gwizdz noted.
Among other factors that underwriters examine: the size and source of the down payment (many are now requiring 20 percent); both applicants' incomes and whether they have been rising; their debt-to-income ratios; and the property they are buying.
CHART: INDEX FOR ADJUSTABLE RATE MORTGAGES: 1-year Treasury rate (Source: HSH Associates)

Correction: December 4, 2011, Sunday

This article has been revised to reflect the following correction: The Mortgages column last Sunday, about applying for a mortgage with a co-borrower with poor credit, misstated the length of time that Tracy Becker, the president of a credit restoration company, suggested that borrowers should be ''hypervigilant'' about paying their bills on time to improve their credit scores. It was for at least a year, not for a few months.