Student loan default rate ‘soaring’

The rising amount of student loan balances has been a worry for many economists in the past few years, as the number of loans extends past the slowly falling unemployment rate. Not only has the amount of student loans increased, but the default rate also continues to rise, as recent reports show.

The National Consumer Credit Trends reported this month that student loan debt that is considered “uncollectable” rose by 36 percent, or $3 billion, in 2012. Credit report agency Equifax also announced in a press release that defaults rose by 14 percent from February 2012 to this year, and that the number of student loans borrowed increased by 13 percent.

“Driven heavily by economic factors, including unemployed or under-employed consumers going back to school along with the rising cost of tuition, student lending has demonstrated consistent, year-over-year growth,” Equifax chief economist Amy Crews Cutts said. “Continued weakness in labor markets is limiting work options once people graduate or quit their programs, leading to a steady rise in delinquencies and loan write-offs.”

Fortunately, this trend seems be one of the few loan types that has a rising delinquency rate – mortgages and auto loans have fallen in the past few years. Still, those taking out student loans will also, if they haven’t already, look to take out a mortgage or purchase a car as well. If this trend continues, borrowers could find difficulty if past loans have hurt their credit, putting pressure on the economy as a whole.

For lenders, however, tools can be used to ensure that banks don’t find themselves in this position. Risk management software can help financial institutions determine who are qualified borrowers. With strong tools, banks can increase profits, giving them the ability to make additional loans and stay solvent.

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