The government has just released numbers showing that student loan default rates are at the highest they’ve been since 1995. The data shows that within two years of graduation, 10% of people are in default, and by year three that rate has risen to over 14%. This is a disturbing trend that seems likely to continue. You can see from the government-provided data below that, since 1992, default rates were on the decline, leveled out, but then began to rise and have continued to worsen over the past six years.
Recent graduates (age 21-25) are at higher risk for unemployment, low wages, and being stuck in part time jobs because companies are hiring fewer and fewer full time workers. And for those whose parents don’t have insurance for them to piggyback on, they will have to pay out of pocket once the Affordable Care Act comes online, despite the fact that they likely can’t afford any additional expenses.
What’s also disturbing is how behind you have to be on your student loans before you’re considered in default. For most financing arrangements, 60 days and you’re earmarked as being in trouble. But for student loans, it takes nine months for you to be considered in default. That means that these borrowers are seriously behind – not a few days or weeks or months – but close to a year.
There are programs that could help – Pay As You Earn or Income Based Repayment – but these aren’t being marketed to those most in need of them. Of the 600,000 borrowers who went into default last year, many would have likely qualified for one of these programs.
Did these indebted and in-over-their-head borrowers not know about these programs? Did they not think they qualified for PAYE or IBR? Were they misled into thinking they didn’t qualify? Did student loan collections agents not properly inform them of the programs and instead try to shake down these debtors for money they couldn’t afford to pay?
The default issue has both consumer, institutional, and governmental facets that must be addressed. The consumer side is getting debtors enrolled in more affordable repayment plans to keep them out of default. The institutional side will be doing something (anything) about reining in schools that are heavy on defaults and low on results. The governmental issue will be offering meaningful and far-reaching alternatives to default.
Those who borrowed to attend for-profit colleges are drastically more likely to default than students from non-profit private and public schools. The overall default rates of 10% and 14%, two years and three years post-college, respectively, are much higher at “proprietary schools” which include schools like University of Phoenix online and trade schools.
You can see above that those who spend four years at public and private schools have default rates of 6.8% and 5.1% respectively, while proprietary schools are roughly double this at 13.4%. And when you track the three year default rate it soars to 21.8%. According to HuffingtonPost, these schools matriculate just 13% of students but account for nearly 50% of defaults.
Once Congress gets back to work post shut-down (whenever that may be), they need to address this growing crisis. The recently passed student loan interest rate package isn’t a great long term solution, but it will hold for a couple of years. Rather than continuing to address legislation at prospective borrowers, our lawmakers desperately need to turn their attention to a solution for the millions of borrowers languishing in delinquency and default with no hope or solutions available.
They need to offer repayment solutions that will allow borrowers to instantly rehabilitate their loans by signing up for these programs. Currently, those already in default may not be able to qualify for these plans until their loans are rehabilitated. You must make three full payments to be able to consolidate your loans to rehab them. If debtors have already done this and then fell behind again, they are out of luck. Their loans are permanently unfixable unless they die or come into a pile of money. This is untenable.
And for loans that have gone into collections where the government has obtained a judgment, there’s no chance of rehabilitation or the opportunity to get into a payment plan. For those who simply can’t afford their payments, allowing this to hang over their heads indefinitely is not a solution. It’s not a win for the borrower or the government. Why not allow an amnesty program where anyone can put their loans into IBR or PAYE?
If someone does re-default, why not allow them the chance to re-rehabilitate them after a certain window of time (in the manner that bankruptcy can be re-filed every seven years)? Why not allow student loans to be forgiven in bankruptcy if they have been outstanding for at least 10 years and there is demonstrated financial inability to pay the loans? How is it helping anyone to force student loan debtors into an inescapable debt trap? It’s not.
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