Student Loans Grow Further, So Does Delinquencies

The quarterly report on Household Debt and Credit by the Federal Reserve Bank of New York showed that student loans have growth further in 1Q12. However, this is associated with an increase in percentage of seriously delinquent student loans and an increase in new delinquent loans.

Also, the student loan is the only form of consumer loan, which has shown a rising trend since 2008 (after the financial crisis).

I had discussed about the student loan being a potential problem for the U.S. banking system in the medium-term. The first quarter trends strengthens my belief that student loans can cause substantial damage to balance sheet of banks.

To keep things simple, I present three charts, which give enough evidence of the growing concern related to student loans and its long-term outcome and implications for banks.

The first chart gives the student loan outstanding in billions of US Dollars from the first quarter of 2003 till the first quarter of 2012

Total Student Loans Outstanding as of First Quarter of 2012

The second chart gives the percentage of student loans, which are 90+ days delinquent or seriously delinquent from first quarter of 2003 till the first quarter of 2012

Percentage of Seriously Delinquent (90+ days) Student Loan as of 1Q12

The final chart gives the amount ( in Billions of USD) of new delinquent student loans (30+days) and new seriously delinquent student loans (90+days) from 1Q 2003 to 1Q 2012

New Delinquent and Seriously Delinquent Loans as of 1Q12

Very clearly, the delinquent loans have been rising along with the rise in total loans outstanding. This is understandable in an economy where jobs growth has been sluggish and the unemployment rate among youth is relatively high.

The critical factor here is that the household on a whole is deleveraging while the student loans continue to increase. Will the banking system tighten their lending even to students in the foreseeable future if delinquency rates get worse?

For now, the list of potential problems for the banking system in the near to medium-term continues to grow. Therefore. from a medium to long-term investment perspective, U.S. banks are an avoid for me. One can always capitalize on oversold conditions to make some short-term gains.

However, the best phase of growth for the U.S. Banking industry is over and the list of problems ensure a long struggle for banks to keep their balance sheets in a relatively healthy state.

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