As of March 2013, 38.6 million Americans have acombined $869.9 billion of student loan debt, which represents anincrease of 16% from the same time just one year ago at $748.6billion. Further, there are currently more than 125 million studentloans outstanding, indicating the average student takes out morethan three loans to cover the full cost of their education.

A combination of economic factors is driving the current studentlending trends of historically high balances and record levels ofdelinquencies: the wave of unemployed or underemployed that areenrolling or returning to universities to gain additional trainingand more marketable degrees; high tuition costs require manystudents to secure multiple loans to cover college expenses; andgraduating students with outstanding loans are entering a weaklabor market, limiting their ability to repay – leading to highernumbers of loan defaults.

Credit unions that have a relationship with a member from anearly age through a checking or savings account have the benefit ofinsight into how that member manages his or her money. Extendingthat relationship, credit unions can take additional steps toensure healthy loan performance by counseling members with studentloan debt on how to best manage their credit, providing financialmanagement training and establishing the institution as aknowledgeable resource. All of these steps create opportunities toprovide further financial support for the next phase of themember's life.

A student loan is unique in the lending industry in that astudent is presumably using the funds to subsidize an educationthat, presumably, will increase his or her future earningspotential. However, at the time of underwriting, the student'sincome is limited, complicating the lender's ability to gauge theborrower's actual ability to repay.

Unlike automobile, home and credit card lending, the collateralfor a student loan is the investment into the human capital itself,which cannot be repossessed later if a loan goes into default. Forthis reason, student loan debt is not discharged in bankruptcyexcept in rare cases, such as for a severe and permanentdisability.

Recent regulations regarding ability to pay have made it verychallenging for individuals under the age of 21 to open credit intheir own name if they are not employed and have tightened up onextending credit card offers with incentives such as freemerchandise due to consumer protection concerns. As a result, thestandard rules of credit, collateral and capacity underwriting thatapply for other credit tradelines do not apply in the same way tostudent loans.

Private student loan providers typically use strongerunderwriting criteria than those demanded by federal student loanprograms, and students can often get a better rate if their parentsare co-signers on the loans. These loans perform better on averageas a result, but are nonetheless affected by the currently weaklabor market affecting graduating students.

In addition to these underwriting challenges, there are threeother primary issues to consider in relation to the nation'scurrent student loan woes. First, the basic structure of a studentloan has remained unchanged for many years. While in school, astudent is typically not required to pay interest on a loan. Upongraduation, the loans fully amortize after a short deferral period,which means students with multiple loans, higher debt and limitedemployment opportunities face considerably higher monthlypayments.

Nine percent of borrowers with student loans owe between $50,000and $100,000, and 3.7% of borrowers owe more than $100,000. Theirfully amortized payments often exceed $500 or even $1,000 permonth, often unaffordable for someone starting out in their career,while unemployed college graduates leveraging deferment periods seetheir loan balances grow due to accruing interest.

Policy discussions around how to improve the performance ofstudent loans have suggested that altering the amortizationschedule of the loans might help, with near-interest-only paymentsearly on and accelerating principle payments as the borrower'scareer matures.

Second, there is a radical change in the longstanding beliefthat going to college, regardless of major, will prepare a youngperson for greater career success. In reality, the market does nottreat all majors equally and students are finally taking notice.Some majors supply graduates at a level that exceeds market demandwhile other skills are in high demand and experiencing a shortage,yet the pricing for tuition and for interest rates on student loansacross all majors remains equal.

While underwriting or setting interest rates based on whatsomeone wants to be when they grow up may not be feasible, there ismounting pressure to hold schools accountable for the marketabilityof their degrees. For-profit universities are facing the greatestscrutiny, but traditional colleges and universities also facechallenges – whether from potential consumer protection regulators,or the tort bar.

Third, there are great shortages of certain skills in theworkforce. One way to increase supply of workers with thesein-demand skills is the concept of loan forgiveness tied to publicservice. Those who graduate with a certain degree such as ateacher's certification or a medical degree can gain specialcompensation by serving in designated communities for a set amountof time. The public service is then used to forgive part or all ofthe debt while using the student's skills to benefit an area inneed.

Some employers also offer student loan forgiveness benefitsafter a certain length of service has been attained in addition totuition reimbursement benefits that they may offer employeescurrently enrolled in part-time college training. While these debtforgiveness benefits are not widely offered, they can give anemployer an edge in not only recruiting top talent, but alsoretaining it.

This policy idea has many benefits to the student as providingexperience, debt reduction, and a better credit rating, as well asbenefits to taxpayers or employers, higher-skilled workers atrelatively low cost, while improving lender balance sheets. Suchprograms already exist; the question is whether they can beexpanded sufficiently to make a dent in the debt andskills-mismatch problems.

The hard truth is that student loan delinquencies will likelycontinue to increase until the labor markets significantly improveand mitigating measures are put into place. Offering creditcounseling, financial management training and outreach to memberswith student loans may give them a boost in getting a handle onthese debt payments.

Regardless, the fact remains: students entering the economy withhistorically high levels of student loan debt limits their capacityand desire to acquire other forms of consumer debt and move on withtheir lives – buying cars, homes, forming families. Long term, moreconsumers with less buying power will result in stifled economicgrowth in what could be an otherwise booming period.

Amy Crews Cutts is chief economist for Equifax.
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