CHICAGO and SAN JOSE, Calif. — As CNW Research noticed
subprime auto loan approvals rising year-over-year by at least 40 percent yet
again this month, TransUnion and FICO Labs spotted potential trouble on the horizon
for lenders and dealers working with customers who absorbed significant debt to
fund higher education.

A recent TransUnion study revealed that more than half of
student loan accounts are in deferred status where the repayment of the
principal and interest of the loan is temporarily delayed. Analysts said deferred
loans now represent 43.5 percent of all student loan balances.

The study also found that reported student loan balances
increased by 75 percent between 2007 and 2012 with the average student loan debt
per borrower increasing 30 percent to $23,829.

And new findings from FICO Labs are even more unfavorable.

As a group, FICO Labs determined individuals taking out
student loans today pose a significantly greater risk of default than those who
took out student loans just a few years ago. The situation is compounded by
significant growth in the amount of debt that new graduates are carrying.

FICO Labs indicated the delinquency rate today on student
loans that were originated from 2005–2007 is 12.4 percent. The comparable
figure for student loans that were originated from 2010–2012 is 15.1 percent, representing
an increase in the delinquency rate by nearly 22 percent.

While the delinquency rate is climbing, the average amount
of student loan debt is increasing even faster, according to FICO Labs.

In 2005, the average U.S. student loan debt was $17,233. By
2012, it had ballooned to more than $27,253 — an increase of 58 percent in
seven years.

By contrast, analysts said the average credit card balance
and the average balance on auto loans owed by U.S. consumers actually decreased
during the same period.

In a related finding, FICO's quarterly survey of bank risk
managers conducted in December found that nearly 60 percent of respondents
expected delinquencies on student loans to increase during the next six months.
The same respondents expected delinquencies on all other types of consumer
loans to decrease, putting the pessimism around student loans in sharp relief.

"This situation is simply unsustainable, and we're already
suffering the consequences," said Andrew Jennings, FICO's chief analytics
officer and head of FICO Labs.

"When wage growth is slow and jobs are not as plentiful as
they once were, it is impossible for individuals to continue taking out
ever-larger student loans without greatly increasing the risk of default. There
is no way around that harsh reality," Jennings continued.

"As more people default on their student loans, their credit
ratings will drop, making it harder for them to access new credit and help grow
the economy," Jennings went on to say. "Even people who stay current on their
student loans are dealing with very large debts, which reduces the money they
have available to spend elsewhere. The stakeholders in the student lending
industry have to take a hard look at the terms and repayment rules for student
loans, and the industry may have to develop a new lending model to prevent a
bad situation from getting completely out of hand."

For now, carriers of large amount of student loans who might
be considered a subprime auto loan candidate are having decent success in
getting the vehicle contract bought by a lender or buy-here, pay-here dealer.

CNW noted that subprime approvals this month are 41 percent
higher than January of last year. Despite that solid year-over-year gain, the
momentum is slowing.

December's year-over-year climb came in at 43.2 percent. In
November, the jump in subprime loan approvals was 44.6 percent while the
industry produced a 47.8-percent rise in October. September marked the
strongest spike of the year-closing string at 62.5 percent.

Orchestrators of TransUnion's study noted that deferments of
student loans may continue to become a consumer issue because more than half of
college graduates under the age of 25 are either unemployed or underemployed —
the highest rate in 11 years, according to an analysis of government data. They
said this construct is exacerbated by the increases in both student loan
balances and deferred balances.

"With the economy either in recession or slowly coming out
of it during the study period, we had expected that student loan balances might
increase as consumers frustrated with the job market went back to school to
work toward a different career path," said Ezra Becker, vice president of
research and consulting in TransUnion's financial services business unit. However,
the rate of growth we observed was truly eye opening."

Between 2007 and 2012, balances of reported deferred loans
jumped from $228 billion to $388 billion. In that same period, average student
loan balances per borrower across all risk spectrums increased from $18,379 to
$23,829.

"It is especially noteworthy that more than half the student
loans in our study were in deferment, and with unemployment rates remaining
high, particularly among recent graduates, the repayment of these loans remains
a concern," Becker said. "Students can defer their loans for only a certain
period, often up to three years. After that, these students can find themselves
in a difficult position financially."

The TransUnion study also highlighted the disparity between
federally backed student loans — those guaranteed by the government — and
private student loans, which are issued by private lenders and are most often used
to cover the gap between funds made available by government loans and actual
tuition rates.

TransUnion indicated federal loans made up 92 percent of all
student loan accounts and 86 percent of overall balances. Between 2007 and
2012, federal loan balances jumped 97 percent while private loan balances only
rose 4 percent.

As billions of dollars were added to student loan balances
between 2007 and 2012, TransUnion also pointed out delinquency rates also
increased. Yet the distinction in performance between federally backed student
loans and private student loans was material, according to the firm.

From 2007 to 2012, federal student loan delinquencies rose
27 percent while private loan delinquency rates actually dropped 2 percent in
that same timeframe. The 90-day delinquency rate for federal loans was 12.31
percent as of March, compared to 5.33 percent for private loans.

"It's important to highlight that both federal and private
student loan delinquency rates are higher than most other credit products such
as mortgages, home equity lines of credit, credit cards and auto loans," Becker
said.

"While the focus in recent years has been on the mortgage
market, lenders will need to keep an eye on student loan portfolios — and on
customers who have student loan debt — as the high delinquency rates among
these borrowers can spell trouble across multiple products," Becker concluded.

Nick Zulovich can be reached at nzulovich@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


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