Deja vu? Student subprime debt surges 32 percent

Key Points
  • The total debt for deep subprime borrowers totaled $8.2 trillion in Q1, a 32 percent increase from the same period a year ago.
  • Total student loan debt is now $1.34 trillion, part of $12.73 trillion in household debt.
How to deal with college debt

As the total student loan debt continues to surge, the quality of borrowers is in steep decline.

The total level of debt for so-called deep subprime borrowers totaled $8.2 billion in the first quarter of 2017, a jump of 32 percent from the same period a year ago, according to SNL Financial citing data from the Consumer Financial Protection Bureau. The category applies to borrowers with less than a 580 credit score.

"It was the first year-over-year increase in more than two years and the largest jump since 2009 when high unemployment rates from the Great Recession sent many consumers back to school," SNL researchers said in a note.

Household debt overall just recently passed the peak it hit before the Great Recession. New York Federal Reserve figures show total household debt at $12.73 trillion, $50 billion above where it stood in the third quarter of 2008.

Of that total, a record $1.34 trillion is education-related, about 11 percent of which is considered seriously delinquent, or at least 90 days past due. That rate is actually a bit lower than the 11.2 percent at the end of 2016.

Despite the seemingly grim trends, economists are not especially alarmed.

In general, they believe the subprime debt situation shows little danger of spiraling into a similar situation as the financial crisis. In the event that triggered the recession, poor-quality mortgage borrowers defaulted in droves, setting off a liquidity crisis on Wall Street that spread through the broader economy.

Michael Pearce, a U.S. economist at Capital Economics cites several trends: The growth in household net worth — $92.8 trillion at the end of 2016 compared with $56.2 trillion at the end of 2008 — along with the debt to household worth and its nature.

The rise in student debt is potentially a bigger concern, because it has been going on for more than a decade with no end in sight,
Michael Pearce
U.S. economist, Capital Economics

While a big number, the $1.34 trillion total for all student debt does not represent near the $10.6 trillion of mortgage debt outstanding at the peak of the crisis. (Interestingly, the $1.3 trillion amount of subprime debt alone then was about equal to the total student loan indebtedness now.) Also, most of the student debt is backed by the government, not the private sector.

"Overall, there is little sign that we are approaching a tipping point after which we will see a sudden increase in defaults," Pearce said in a recent note. "And the bigger picture remains that the overall household debt burden is stable and still well below its previous peak."

Still, he notes that combined with the surge in auto loans, which have seen their highest delinquency rates in four years, Americans are getting a little stretched on credit.

"The rise in student debt is potentially a bigger concern, because it has been going on for more than a decade with no end in sight," Pearce added. "The sharper increase in average debt among older borrowers suggest that there is a rising share of the population struggling to repay legacy student debt."

Donghoon Lee, research officer at the New York Fed, said in a statement that the rising debt levels are "neither a reason to celebrate nor a cause for alarm" and Pearce generally agrees, though he sees potential dangers should the economy go south.