Student loans have become an increasingly heated topic in recent years as college costs continue to rise while youth employment opportunities remain limited. With outstanding student loan debt reaching $1.7 trillion in the US, banks have grown more hesitant to issue further student loans due to the high risks involved. The core issues lie with students’ limited ability to repay loans and insufficient post-graduation incomes. This article will analyze the factors that contribute to student loans’ high risk from the bank’s perspective.
Limited credit history and income sources make repayment ability uncertain
Most student loan applicants are young adults with little to no credit history, making it difficult for banks to assess their ability to repay debts. College students rarely have stable full-time jobs, relying instead on occasional part-time work, stipends, or family support. Their income sources are irregular and undependable. Even after graduation, students may struggle to find employment that provides sufficient income to cover monthly loan payments and living expenses. With no collateral behind student loans, banks take on substantial risk of default.
High debt-to-income ratios post-graduation hinder repayment
Excessive student loan burdens paired with limited entry-level wages result in dangerously high debt-to-income ratios for many graduates. Average monthly payments on student loan debt range from $200 to $300, which constitutes a large portion of recent graduates’ paychecks. Grads earning $40,000 to $50,000 per year could easily face debt-to-income ratios of 30% or higher just from their student loans. Such heavy debt burdens make it extremely difficult to budget for rent, utilities, transportation, and other necessities on top of loan payments.
Rising delinquency and default rates increase banks’ credit risks
Over the past decade, student loan delinquency and default rates have increased at an alarming rate. The latest data shows nearly 11% of student loan balances are 90 days or more delinquent. Many of these delinquent borrowers will end up in default. High default rates directly translate to substantial losses for lenders. Inability to collect on issued loans undermines banks’ profitability and erodes confidence in the viability of student lending.
Limited repayment options compared to other loan types
Banks have fewer repayment options to assist borrowers who struggle to make monthly student loan payments compared to options available for mortgages or auto loans. There are limited possibilities to restructure student loans or temporarily reduce required payments. This lack of flexibility results in more loans ending up in default, contrasting with relatively low default rates for mortgages and auto loans where modified repayment plans help borrowers avoid default.
In summary, factors like students’ uncertain repayment ability, high debt burdens after college, escalating default rates, and inflexible repayment terms all contribute to the perception of student loans as entailing excessive risks for lenders. These dynamics help explain banks’ increasing reluctance to issue student loans compared to other more secure lending markets.