Young servicemembers more likely to default within six months after separation from service than prior period, CFPB finds

A report looking at debt delinquencies of young servicemembers leaving active duty show credit defaults and other “derogatories” are more likely to occur in the six months after separation for those who served at least seven months and up to 35 months, the Consumer Financial Protection Agency (CFPB) said Tuesday.

The CFPB said its findings show that among those who serve at least seven months, delinquencies and defaults are between two and 10 times more likely to appear on a credit record in the six months after separation as compared to the six months before.

The report focuses on auto loans, revolving credit accounts (credit cards), and personal or retail installment loans, and that it also analyzes medical and non-medical debt – overall, the types of accounts found in earlier research to be the most likely sources of delinquency and default among young servicemembers, the bureau said.

Account ownership at various points of active duty service by length of service (Source: Figure 2 of CFPB report, “Debt and delinquency after military service,” November 2020)

The bureau found that of all servicemembers who exit with auto debt after seven to 35 months of service, one-third become 90 days delinquent or default on that debt within one year. By comparison, less than 15% of auto debt holders with longer terms of service went delinquent or defaulted within one year after separation. For both groups, it said, the post-separation rates of delinquencies and defaults for revolving accountholders and for those with less-common types of installment debt (such as personal loans) are even higher than for auto debt.

“Conditioning on those who actually have an account at the time of separation (Figure 2), it is particularly likely that those with other installment loans will have trouble paying off that debt,” the bureau concludes in its report. “Looking at the fraction of accountholders with either a delinquency or default within one year of separation, the numbers for those who serve seven to 35 months are as follows: 34 percent (auto loans), 38 percent (revolving accounts), and 64 percent (other installment accounts). For those who serve longer, the numbers are: 33 percent (auto loans), 21 percent (revolving accounts), and 33 percent (other installment accounts).

Debt and delinquency after military service: A study of the credit records of young veterans in the first year after separation