Third Of Student-Loan Debt Belongs To Subprime Borrowers

About one-third of all student-loan debt belongs to so-called subprime borrowers, and a growing number of these risky loans aren't being paid on time, a new report said.

Nearly $300 billion of the almost $900 billion in outstanding student loans was held by the riskiest category of borrowers in March 2012. Of the subprime student loans that have come due, 33% were considered delinquent, a rise from 24% five years prior, according to the report from TransUnion LLC, released Wednesday.

"There's a concentration of risk in the student-loan marketplace," says Ezra Becker, who oversaw the report as vice president of research and consulting at the Chicago-based firm's financial-services business unit.

Subprime loans are making up only a slightly bigger slice of the student-loan pie than in 2007. The big difference is that the pie itself—the amount of student debt outstanding—has grown much larger, and a higher proportion of loans aren't paid on time.

The dollar amount of student loans outstanding rose 75% between 2007 and 2012, with federal loans making up most of the increase, the report says. Over the same period, the average amount of debt held by each individual borrower rose 30% to around $24,000.

More than 12% of federal student loans were considered delinquent as of March 2012, meaning a borrower hadn't made payments for 90 or more days after first missing a payment. That is up from less than 10% one year earlier. A single borrower can have multiple student loans show up on their credit report.

TransUnion says it was able to pull information from the vast majority of borrowers with student loans. It used the VantageScore, a credit score developed by TransUnion and the two other major credit-reporting firms, to gauge a borrower's risk level.

Some of these subprime borrowers likely have low credit scores because they went back to school after a period of tough financial times that weighed on their credit, Mr. Becker said. Others may have low scores because they are young students with short credit histories that lack a mix of types of debt.

The report also broke out data specific to private student loans, which have come under fire recently. Just over 5% of private student loans were delinquent, significantly lower than the federal rate.

But both delinquency rates were higher than those on other kinds of debt, including mortgages.

The difference in delinquency rates "reflects some pretty significant differences in how [the loans] are structured," says Mark DeVries, senior consumer finance analyst at Barclays BARC.LN +0.37% . While federally guaranteed loans usually don't require a credit check, private student loans typically do.

Despite their lower delinquency rates, these private student loans have recently been a magnet for criticism. Senate Democrats this week unveiled legislation that would allow private student loans to be more easily discharged in bankruptcy. Federal law prohibits both private and federal student loans from being discharged in bankruptcy court, except in rare cases.


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