The housing crisis sent many families into an economic downward spiral but the next national financial crisis, student loans, may be an even larger problem.  During the first quarter of 2013, student loan debt increased by $20 billion. As of March 31, 2013, total outstanding student loan debt reached $986 billion. If we see another $20 billion quarter then this figure will top $1 trillion. 

The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit (PDF) reveals that the total consumer debt load in the nation topped $11 trillion in Q1 2013.  

Q1 2013 Total Debt Percentages

  • Mortgage debt – 71 percent
  • Student loans – 9 percent
  • Auto loans – 7 percent
  • Credit cards – 6 percent
  • Home equity revolving loans – 5 percent
  • Other debt – 3 percent
Student loans are now the second largest source of consumer debt. While it is highly unlikely that student loan debt will ever top mortgage debt, the growing student loan balances are disturbing, especially once you account for delinquencies. According to the report, 11.2 percent of student loans are 90+ days late. This is down, slightly, from the Q4 2012 figure of 11.7 but more than one in 10 student loans is delinquent by a minimum of three months.

There are more 90+ day delinquent student loans then any other loan type. This means that consumers are prioritizing every other type of debt over student loans.  While I understand the need to pay a housing payment or car payment before a student loan, I don’t understand paying an unsecured loan before a loan that is secured.

If you don’t think that a student loan is secured, think again.  The federal government can garnish your wages, confiscate your income tax refund and even withhold money from Social Security payments in order to repay a defaulted loan. 

Bankruptcy isn’t a solution, either. Consumers that default on their school loans can only include these loans in a bankruptcy in the rarest of cases. This means that you either pay off your student loans or they will be discharged upon your death.

Delinquencies are more prevalent in states that were more severely affected by the Great Recession.  In Florida, 15.4 percent of student loans are delinquent. In Nevada, 14.8 percent of loans are late and in Arizona the figure is 13.7 percent. West Virginia has the highest percentage of delinquent student loans with a 17.8 percent delinquency rate.

It is graduation season and so this news is timely. Parents and future college students should think twice about maximizing student loans to pay for their education. Take the time to research other funding options and use loans as a last resort. If you do need to use loans, minimize your loan balance.  Many school financial aid departments automatically pay out the maximum allowed; if you don’t need it, don’t accept it.

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