A public debate is raging over private student loans.
Recently, a private loan data company called MeasureOne issued a study that contradicted some common knowledge: Delinquencies on private loans are lower than on public loans.
The dispute matters to more than just bankers and the federal government, who eat the cost of college grads that can’t pay back their student loans.
There’s some valid debate going on about whether private loans are just as bad as everyone says, or whether the delinquency rates really are falling. Here’s what we know about the debate, and keep reading for our prognosis…
Argument 1: Delinquency rates on private loans are going down because of tighter restrictions by lenders.
Delinquencies happen when you can’t pay back your loans. Both private and government-backed loans have a certain percentage of people who can’t pay back what they owe for college, so lenders label those borrowers who can’t make payments as delinquent, usually if they miss payments for between 30 and 90 days.
The rates have a history of being too high for many experts’ liking, and — partially as a result of the economic crisis in 2008 — banks became more protective of their assets instead of just handing out loans like candy.
Now, MeasureOne says that serious delinquencies, or payments that are 90 days past due, have fallen below three percent. That’s a 22 percent improvement from the same time last year. “Early-stage delinquencies,” or payments that are 30-89 days past due, fell at a similar rate.
Dan Feshbach, CEO of MeasureOne, offered this explanation: “I think it’s more prudent choice by students, and more prudent underwriting by the lenders,” he said.
Argument 2: Delinquency rates for both federal and private loans have gone up almost continuously since 2005.
The New York Federal Reserve disagrees with MeasureOne’s findings. In fact, they project the delinquency rates on both federal and private loans to be at 11.1 percent this year.
That number is historically high, as the delinquency rates have ranged from 6 to 9 percent from 2003 through 2011. For three years after the borrower begins paying back the loan, the Fed tracks how well he or she is doing. It labels as delinquent people who have gone at least one year with making a payment on both private and federal loans.
The Fed also says that delinquency rates are likely worse than its data show.
Argument 3: The difference is due to methodology.
Why the discrepancies in the data? According to Feshbach, it’s a result of different methodologies.
“MeasureOne looks only at private loans, while the study by the New York fed is based on credit bureau data — all student loans, all federal, all private,” he said. “Both studies are measuring close to the same thing, just in different cohorts.”
Conclusion: Both numbers could be skewed, but it is safe to conclude that neither private nor public loans have low-enough rates of default to consider them “safe.”
Even when different methodologies are taken into consideration, the studies still leave a lot to be desired. Here’s why:
- Parents can co-sign for a private loan, meaning they can take over the loan if the student is unable to make payments thus threatening delinquency;
- Delinquency rates for private loans do not include loans that the bank has already written off as hopeless and sent to a debt collections agency, meaning actual rates of default could be much higher;
- Student loans that are currently in a grace period, deferment or forbearance don’t get counted since the borrower is not required to make payments.
In other words, the studies may not express the difficulty students have paying back their loans on time.