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September 12, 2011 – Although student loans can help finance a college education for many students who need the extra help, studies released today from the U.S. Department of Education show that student loans are increasingly throwing students in over their heads in debt.
“These hard economic times have made it even more difficult for student borrowers to repay their loans,” U.S. Secretary of Education Arne Duncan said in a press release.
The department’s data shows that the default rate for student loans rose substantially between the fiscal years 2008 and 2009. The overall national student loan cohort default rate rose from seven percent to 8.8 percent. Broken down by department, the data indicates that the rate rose from six percent to 7.2 percent for public institutions, from four percent to 4.6 percent for private institutions and from 11.6 percent to 15 percent at for-profit schools.
These rates account for students whose first loan payment was due between Oct. 1, 2008 and Sept. 30, 2009 and who defaulted before Sept. 30, 2010. There are 320,000 students that fall in this category, out of 3.6 million who took out loans at 5,900 different schools.
The increase in students that are unable to pay off their student loans will not only affect the students, but may also cause schools with the highest rates to face federal consequences, such as losing eligibility for federal aid programs.
Based on the data released today, five schools face possible penalties; these schools are those that had a default rate above 25 percent for three consecutive years, a rate that was more than 40 percent in the most recent fiscal year or both. The institutions are: Tidewater Technical, Norfolk, Va.; Trend Barber College, Houston, Texas; Missouri School of Barbering & Hairstyling, St. Louis, Mo.; Sebring Career School, Houston, Texas; and Human Resource Development & Employment – Stanley Technical Institute, Clarksburg, W.Va.
In response to this increase in student default, the U.S. Department of Education has taken new measures to ensure that schools are accurately and extensively informing students about their financial decisions. These protective measures include a college affordability and transparency list, which shows “schools with the lowest and highest tuition and fees, their average net price and those institutions whose prices are rising at a particularly fast rate, and they allow students to compare costs at similar types of institutions,” the press release stated.
In addition to these changes, the department announced that it will begin measuring default statistics based on a three-year period, rather than the two-year one it has employed previously.
For the sixth straight year in a row college loan defaults have risen, according to a Department of Education report.
Numbers released by the Department of Education reveal that of the 4.1 million borrowers that began making payments in late 2009 and early 2010, 9.1 percent defaulted within just two years. This is a 0.3 percent increase in defaults from the 8.8 percent seen one year ago.
“Student loan defaults still continue to plague too many borrowers. The numbers are distressing, and they needn’t be so high,” said Debbie Cochrane, research director for The Institute for College Access & Success, in a USA Today news report.
Experts attribute the default increase to soaring college loan debt, the weak economy, and a lack of borrower education. Unlike previous years where the increase was largely attributed to for-profit colleges, this year’s increase can be blamed on borrowers who attended non-profit colleges. Public college loan default rates stand at 8.3 percent compared to 5.9 percent just four years ago, according to the report.
Surprisingly, for the first time in four years, the two-year default rate for for-profit colleges fell from 15 percent last year to 12.9 percent this year.
For-profit schools have long been criticized for luring in unqualified students while failing to disclose employment and college loan debt rates. In recent years, for-profit schools have implemented new policies that control student recruitment and advertising while changing some financial aid aspects. This may have contributed to the for-profit default rate dropping.
“This is a sign those rules are somewhat successful. All the criticism has lead to these colleges trying to clean up their house,” said Mark Kantrowitz, publisher of FinAid.org and fastweb.com, in a USA Today interview.
Kantrowitz believes college loan default rates have reached their peak and he expects them to drop next year based upon reforms, lower interest rates, and a better economy.
At least one politician joined Kantrowitz in his criticism of the current situation.
“This default data raises serious questions about the quality and value of the education students receive from these schools,” said Sen. Tom Harkin, D-Iowa who led several committee investigations into for-profit educations, in a USA Today interview.
Yesterday the Federal Reserve reported that U.S. banks have seen an increase in demand for car loans and commercial and residential mortgages during the third quarter.
According to Ward’s Automotive Group, cars and lightweight trucks sold at a 14.9 million annual pace during September, the highest since March 2008. Similar growth was seen in the home sector. According to last week’s Commerce Department report, new homes sold at a 389,000 annual pace during September—the largest pace in two years.
“Significant fractions of banks reported a strengthening of demand for commercial real estate loans, residential mortgages, and auto loans, on balance,” the Federal Reserve said in its October survey of senior loan officers. “Demand for most other types of loans was about unchanged.”
There is further evidence from the report that auto and home sales are helping to fuel the U.S. economic recovery. The sales boost is provided by record-low interest rates on car loans and mortgages. The U.S. central bank has reduced interest rates on various loans, including car loans, to nearly zero. Additionally, last month it announced a third round of “qualitative easing” to further reduce borrowing costs. All of these efforts are in the hopes of encouraging businesses to hire and invest in more American employees.
The quarterly survey of 68 domestic banks and 23 U.S. branches and agencies of foreign banks also examined other sectors of the economy. The Federal survey illustrated that while home and car loans are increasing, the standards for real-estate divisions remained unchanged. Adolfo Laurenti, deputy chief economist at Mesirow Financial Inc, said the decision to ease standards for some areas has “been schizophrenic.”
“On the one hand we want banks to resume lending and make the economy stronger but on the other hand we want banks to reduce risk exposure, have more vanilla contracts, higher capital requirements and so on,” Laurenti said to Bloomberg.
Some U.S. banking officials have been overwhelmed by the slow-rebuilding economy. Unemployment levels remained at around 7.8 percent, the same as in September. Analysts credit a lack of credit for small businesses as a main factor for the unchanged levels. Other analysts critique a lack of credit-worthy borrowers as the main reason for stagnant results.
Ellen Zentner, a Nomura economist, blamed the results on a business fear. She told Reuters, “The lack of pick-up in demand for commercial and industrial loans is a reflection of a reluctance to hire amid heightened business uncertainty.”
A recent report from TransUnion shows that delinquency rates for car debt have increased.
In 2012, the number of delinquent auto loans rose from 0.33 percent in the second quarter to 0.38 percent in the third quarter. Debt payments are considered delinquent after 60 or more days past the due date.
Even though this is a relatively low rate of delinquency, the amount of outstanding car debt that borrowers had from banks still increased. In the third quarter of 2011, the amount stood at $12,902, but by the third quarter of 2012, that figure rose by five percent to $13,571, according to TransUnion.
“Since TransUnion began tracking the auto loan delinquency rate in 1999, we have observed a seasonal increase in this variable every year between the second and third quarters. This has occurred even with auto loan delinquencies dropping 56 percent since the recession high of 0.86 percent set in the fourth quarter of 2008. Seasonal factors include consumers balancing increased spending due to back to school needs and holiday purchases,” said Peter Turek, automotive vice president in TransUnion’s financial services business unit, in a press release.
In the space of a single quarter, from the second quarter of 2012 to the third quarter of 2012, 38 states saw increases in delinquency rates. Fortunately, the amount of car loan originations increased by 16 percent in the second quarter of 2012 compared to the second quarter of 2011. The number of non-prime high risk borrowers who were delinquent in their payments increased from 30.2 percent in the second quarter of 2011 to 32.8 percent in the second quarter of 2012.
TransUnion officials remain optimistic in the wake of recent statistics that show economic recovery and an improved outlook.
“With increased auto loan balances and more loans going to non-prime borrowers, it is plausible that some pressure may be placed on the auto loan delinquency rate. However, as the economy continues to improve and new and used auto demand maintains its current pace, we believe that the auto loan delinquency rate will either remain the same or even drop a few basis points by the end of the year,” said Turek.
TransUnion compiles its data from consumer information, unemployment rates, economic assumptions, and interest rates. The data that TransUnion analyzes is composed of 27 million anonymous consumer records.
Banks and lending institutions are approving more subprime borrowers for auto loans, with approval numbers reaching prerecession levels, according to a report released Tuesday.
According to an Experian Automotive report, in the third quarter of the fiscal year (Q3), auto loans were approved at lower credit scores, with an average of 755. In comparison to Q3 in 2007, the average score for an auto loan was 749. One year ago, the average score was 763.
Melinda Zabritski, director of automotive credit at Experian Automotive, said leasing had continued trending upwards due to lenders openness to risk.
“Consumers were in a good position to obtain a vehicle during Q3,” Zabritski said in a release. “Expanding loans to lower-risk tiers opens the market for more car shoppers, while an increase in leasing means it is easier for consumers to get more vehicle for a lower monthly payment. Both of these trends are positive signs of a strong and recovering auto finance market, which ultimately benefits the consumers and the entire auto industry.”
The report shows the highest and lowest average credit scores that were tied to new auto loan originations. Volvo topped the charts with an average borrower score of 818, while Mitsubishi had the lowest average borrower credit score of 694.
|Auto Maker||Score (High to Low)|
|Other auto makers were included in study. Only the highest and lowest scores are listed.|
The analysis showed that the market share for nonprime, subprime and deep-subprime automotive loans for new vehicles grew by 13.6 percent. New leasing grew by 7.53 percent year-over-year.
Additionally, auto loans for new vehicles, financed to customers with nonprime, subprime or deep-subprime credit rates, increased from 21.87 in Q3 2011 to 24.84 in Q3 2012. For used vehicles, lending rates increased in the same Q3 time period from 51.60 in 2011 to 54.43 in 2012.
Experian also reported the manufacturers who secured the most auto loans. Toyota held the top position in Q3 2012 with 14.09 percent of all new financed vehicles. Ford claimed second position with 13.16, and Chevrolet followed with 11.10 percent.
Cars will be a strong investment in 2013, according to several industry reports.
TransUnion and the American Bankers Association both issued recent reports on the auto lending industry that covered outstanding loan balances, delinquencies and lending companies’ openness to subprime borrowers.
According to a recent report from TransUnion, the number of consumers with remaining balances on their auto loans has increased in the past year. In Q3 2011, there were $59.27 million in outstanding car loan balances, which increased to $61.68 million in Q3 2012.
Auto loan debt, per borrower, increased from $12,902 to $13,571 in the same periods. This number has increased since Q1 of 2011. For 2013, TransUnion predicts it will grow to $14,133 by the fourth quarter.
In addition, more subprime borrowers are being approved for auto loans. In Q3 2011, about 19.97 million borrowers with credit scores of less than 700 carried auto loan balances. In Q3 2012, that number increased to 20.66 million.
“Consumers willing to take on more debt is a reflection of their confidence in their ability to manage that debt,” Peter Turek, automotive vice president at TransUnion’s financial services business unit, told loans.org. “At a high level, increase in auto debt means that consumers have confidence in the economy and their employment situation and ability to pay the auto debt.”
Regardless of confidence, consumer’s ability to repay is paramount.
“In the end, any kind of additional debt is only good if consumers operate clearly within their budget,” Turek said.
Even though more sub-prime consumers are carrying loan balances, TransUnion reported a low national auto loan delinquency rate.
Turek said this is a sign that the auto industry is on solid ground.
“Consumers are striving to manage all their debts as we continue to emerge from the recent recession,” he said.
A TransUnion study revealed that participants paid their car loans before their credit card or mortgage payments.
“We believe this is happening partly because consumers are now valuing their auto loans even more than their credit card and mortgage loans; also lenders and dealers are putting even more emphasis on placing buyers in vehicles and loans that best fit their financial situation,” Turek said in a release.
For other industry groups, consumers were less faithful with repayment.
The American Bankers Association (ABA) reports that auto loan delinquencies have grown. According to the ABA, direct car loan delinquencies rose from 0.92 percent to 0.95 percent in Q3 of 2012.
Keith Leggett, ABA senior economist and vice president, told loans.org that the increase is minor and does not reflect a major change from outside factors.
He said the fact that consumers are increasing loan balances in 2013 is good for the economy.
“It reflects that people are doing a better job at managing their finances,” Leggett said to loans.org. “When people are struggling or delinquent on their debts, that really amounts to a debt weight loss to society.”
James Chessen, ABA’s chief economist, agrees with Leggett.
“Consumers are paying close attention to their finances as they continue to pay down debt in an uncertain economy,” Chessen said in a press release.
In comparison to the automobile lending industry, other loan delinquencies such as personal lending and property improvement loans fell.
“Some categories have reached historical lows leaving little room for improvement. In addition, slow job growth, continued uncertainty and falling consumer confidence could signal rising delinquencies in the year ahead,” Chessen said.
Regardless if a consumer has good or bad credit, Turek told loans.org that the most important element is education.
“The most positive impact a consumer can have when buying a car is to educate themselves.”
Fixed mortgage interest rates moved higher this week according to Freddie Mac’s weekly survey.
Freddie Mac, a provider of stability and liquidity for the United States’ residential mortgage markets, conducts weekly surveys to assess four types of mortgage interest rates.
For the week ending Jan. 24, 2013, the 30-year fixed-rate mortgage (FRM) averaged 3.42 percent with an average 0.7 point. The rate is up from last week when it averaged 3.38 percent. A year ago, the 30-year FRM averaged 3.98 percent.
If a borrower took out a $150,000 mortgage at today’s mortgage interest rate of 3.42 percent, his or her monthly payment would be $666.89. After 30 years, he or she would pay a total of $240,080.40. If a borrower took the same mortgage out one year ago when mortgage loan interest rates were 3.98 percent, they would pay $714.39 monthly for a total cost of $257,180.40 after 30 years. Using the current home loan interest rate rather than last year’s, borrowers would save $17,100.
The 15-year fixed-rate mortgage averaged 2.71 percent with a 0.7 point, up from last week when it averaged 2.66 percent. At this time last year, the 15-year fixed mortgage interest rate averaged 3.24 percent.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.67 percent with a 0.5 point this week, the same as last week. At this time last year, the 5-year ARM averaged 2.85 percent.
The 1-year Treasury-indexed ARM averaged 2.57 percent with a 0.5 point, the same rate as last week. A year ago, the 1-year ARM averaged 2.74 percent.
“Fixed mortgage rates were up slightly over the holiday week but remain highly affordable and should continue to aid in the ongoing housing recovery,” said Frank Nothaft, vice president and chief economist for Freddie Mac, in a released statement.
Nothaft said that existing home sales totaled 4.65 million in 2012, a 9.2 percent increase over 2011. Last year’s pace was the strongest in five years.
A recent survey found that despite receiving less income due to the payroll tax increase, Americans are not changing their spending habits.
The survey, conducted by Accounting Principals showed that nearly one quarter of Americans have not reduced their spending habits, even though they earn an average of $130 less each month. The monthly income reduction is due to the two percent tax increase which started on Jan. 1, 2013.
Part of the reason could be due to high consumer sentiment. The Thomson Reuters consumer sentiment index, which measures consumers’ confidence in our market and economy, increased from 73.8 in January to 77.6 percent in February, contrary to economist forecasts.
In order to make up for the paycheck loss, some consumers are tapping into their savings accounts, retirement funds or resorting to high interest credit sources such as personal loans. In fact, the survey found that nearly one-third of employed Americans have pre-maturely pulled money from retirement funds such as 401(k)s and IRAs.
Jodi Chavez, senior vice president of Accounting Principals, said that it is interesting that savings is still not a priority for working adults.
“It’s clear most Americans don’t feel 100 percent secure financially, and don’t have expendable cash,” she said to loans.org. “Many people are likely working to address any current debts before focusing on long-term savings.”
But Chavez said that each individual must assess their own financial situation to decide what method is best, whether it is taking out a personal loan or tapping into retirement funds.
“There is no one-size-fits all method when it comes to borrowing,” she said.
The study found that food is a top expenditure for consumers. Sixty-five percent of surveyed adults said going to lunch or buying snacks is their biggest spending pitfall. Eighty-two percent buy coffee regularly, adding up to an average of $21 per week, and 89 percent spend money on lunch, averaging $36 per week.
“There’s a social and convenience factor associated with spending on food during the workday,” Chavez said. “Today’s working Americans are all busy and stretched for time. The planning and packing associated with bringing lunch to work is sometimes a time commitment that everyone can’t always stick to.”
This year’s results are similar to 2012, signifying that although working adults receive less money due to the payroll tax increase, they are not changing their spending habits.
“Although Americans are cutting back on some purchases during the week, it doesn’t seem to be enough to keep them from dipping into their long-term savings,” Chavez said.
For the consumers that did alter their spending habits, the survey found that it was usually by reducing non-essential spending such as restaurant visits, happy hours or shopping.
Home loan interest rates dropped lower this week and increased competition for buyers according to rate reports and interviews provided by loans.org.
Interest rates have drastically declined for the past two weeks since the Fed announced that they would not start to reduce their bond purchase program. Last week the initial shock from this inaction sent the home loan interest rates down. This week, the rates continued their decline.
For the week ending Sept. 26, 2013, the 30-year fixed-rate mortgage averaged 4.11 percent. This was a decrease from 4.31 percent reported last week.
Although the rates are higher than historic lows, they have calmed significantly in the past month. Rate reports on Aug. 22, 2013, merely one month ago, showed the 30-year rate at 4.55 percent. The recent interest rate reduction could save borrowers thousands of dollars over the course of an average mortgage loan term of 30 years.
If a borrower took out a $250,000 mortgage at today’s average 30-year rate of 4.11 percent, his or her monthly payment would be $1,209.45. After 30 years, the borrower would pay a total of $435,402 in combined mortgage and interest costs.
If the same borrower took out a 30-year loan one month ago, when rates averaged 4.55 percent, he or she would pay $1,274.15 a month for a total repayment cost of $458,694. Taking out a loan today in comparison to one month ago would save a borrower $23,292.
The second home loan interest rate change reported this week is the 15-year FRM. It averaged 3.15 percent, another large decrease from 3.31 percent set last week.
Finally, the 5/1 adjustable-rate mortgage shifted downwards from 3.03 percent last week to 2.91 percent this week.
Gus Altuzarra, CEO of Vertical Capital Markets Group, said that the rates have moved substantially in a short period of time because the 10-year treasury index has been “extremely volatile.”
“The rates are heading in a direction that they need to if the government wants to keep the housing movement in the right direction,” he said.
Despite the decline after the Fed announcement, Altuzarra predicts that interest rates will not likely drop more than 10 basis points.
“I don’t think we are going to see a big continual drop because everybody knows that tapering is going to come,” he said. “It will be interesting to see what data is going to come out about the housing market in October.”
The quick and drastic changes to the housing market are positive for some buyers and harmful for others according to Allan Glass, president of ASG Real Estate.
He said there are three types of buyers in the housing market: cash buyers, buyers with large down payments and buyers with small down payments that utilize FHA products. This third group is most affected by the home loan interest rate changes.
Since the start of 2013, these three groups have fought for similar purchases, leaving those at the bottom, the FHA dependent buyers, out of luck.
“The groups that are being harmed the most need the most leverage,” Glass said.
Lower rates have increased the competition for all three groups of buyers, but it affected the bottom the most. Cash-only buyers are able to finalize a deal quickly whereas FHA-backed loans must be approved and borrowers could be rejected and lose their chance at the property.
The competition stimulates the housing recovery, but Glass said it “makes things difficult for buyers that are stretching every last dollar and barely qualifying to purchase.”
Altuzarra believes that despite the competition, there are still potential buyers that are waiting for a better lure to purchase a home. He said society is addicted to low interest rates.
“How do you wean people off it without bringing the housing market to a halt?” he questioned.
One cause is tight and unsensible underwriting regulations. He said that underwriting needs to be adjusted so that people are able to qualify for more loans because right now, consumers are “hamstringed by regulations.”
“If we stall this housing market, this economic recovery is going to take a lot longer,” Altuzarra said.
Mortgage loan interest rates were impacted by several industry factors and continued to increase according to this week’s rate reports.
Despite a general upwards trend, over the past few weeks all three mortgage loan interest rates have changed minimally, usually increasing less than 10 basis points per week. Both fixed and adjustable interest rates decreased due to the government shutdown in September, but all three rates have slowly rebounded in the following weeks.
For the week ending Nov. 14, 2013, the 30-year fixed-rate mortgage averaged 4.16 percent, a seven basis point increase from 4.09 percent reported in the previous week.
The second rate change this week is the 15-year FRM which averaged 3.14 percent, a small upswing from last week’s 3.1 percent.
The 5/1 adjustable-rate mortgage, the final mortgage loan interest rate reported, increased only three basis points from 2.74 percent to 2.77 percent.
In comparison to several weeks in September that were mainly influenced by a singular event, the government shutdown, this week’s housing report was influenced by several factors.
One change in the housing economy is the downtrend of down payments. The average down payment in the United States decreased 2.74 percent from the last fiscal quarter, according to a new report from LendingTree. On a national scale, average down payments decreased from 16.1 percent in Q2 2013 to 15.74 percent in Q3 2013.
The three states with the lowest average down payment percentage on a 30-year mortgage loan are Nebraska (12.5 percent), South Dakota (12.8 percent) and Arkansas (12.9 percent). The three states with the highest average down payments are in generally high-cost areas of housing such as New York (18 percent), California (18.6 percent) and New Jersey (18.8 percent).
Average loan amounts also fell. Mortgage loan amounts decreased from $221,694 to $218,343 in the same time period.
The changes are an outcome of looser lending standards according to Doug Lebda, founder and CEO of LendingTree. He said that lenders are adjusting the minimum requirements as an incentive to attract more mortgage loan borrowers.
Lending risks have also decreased.
“When we see lenders accept lower down payments from qualified borrowers, it shows lender confidence in the market and in home values,” Lebda said.
The improved market has created a more positive lending environment, causing approval rates to grow. A J.D. Power report released today found that customer satisfaction with mortgage loan origination lenders has jumped to a seven-year high.