Almost 7 million Americans have not made a payment on their federal student loans for at least a year, and this extremely high level of default seems to show that a significant number of US households cannot, or are not willing to, pay back their school debt, writes Josh Mitchell of The Wall Street Journal.
That means that 17% of student loan holders have gone at least 360 days without making a payment to the government.
In spite of the fact that unemployment has been dropping over the past year and an effort on the part of the Obama administration to enroll borrowers in programs that would lower borrowers’ monthly payments, serious delinquencies are rising. But the problem appears to be with student loans; the pattern of delinquencies does not hold for other types of debt such as mortgages and credit cards, where the non-payment numbers have fallen, as have shorter-term defaults on student loans.
An example of a typical borrower is Derek Lance, 31, who says he has gone over a year without paying his student loan debt, which remains stagnant at about $70,000. Lance has, however, been paying high rent for his apartment in San Francisco and is not making a large salary.
“I figured I wasn’t going to be able to make payments, so I kind of just brushed it off to the side,” said Mr. Lance, whose loans covered college and grad school.
When he learned that his mother, who co-signed on the loan, could become targeted by debt collectors because of his non-payment, he found a less expensive apartment, found some roommates, and started making payments.
New data found that 11.5% of outstanding student debt was at least 90 days in arrears or in default by June 30, reports Shahien Nasiripour for the Huffington Post. That is up from about 10.9% at the same time last year, explains the Federal Reserve Bank of New York. According to the New York Fed, around one in four borrowers who have loans which have come due are severely delinquent, which is double the published rate, since approximately half of all student debt at this time does not require a monthly payment.
In comparison, the amount of total household debt that is delinquent fell to 3.98%, a figure which has not been below 4% since 2007. The New York Fed estimates there is roughly $1.2 trillion in outstanding student debt shared by over 43 million borrowers. Of the outstanding student loan debt, about 90% is owned or insured by the federal government.
Such a large increase in distress could be blamed on poor loan servicing. Loan servicers collect monthly payments and counsel their borrowers on their repayment options.
“When borrowers reach out for help, student loan servicers need to own up to borrowers and tell them the truth about their options, rather than steering them into a plan that gets them off the phone quickly,” Rohit Chopra, formerly the top student loan official at the federal Consumer Financial Protection Bureau said.
Education Department Secretary Arne Duncan has encouraged loan servicers to improve their treatment of borrowers. President Obama has ordered that Duncan and other high-ranking officials explore new methods to stem the rising number of defaults.
Molly Triffin of LearnVest writes on Business Insider that Andrew Josuweit held $74,000 in student loan debt when he graduated in 2009. The recession had kicked in and he was unemployed, so he had to move back in with his parents and was soon receiving unemployment benefits.
His web development company made just $12,000 the first year, so he did not have to make his monthly student loan payment of $850, which he deferred for three years. By the time his deferral expired, his company had started to make a profit, but he was unable to keep up with the interest on his loan balances. Collection agencies began calling.
In 2013, he enrolled in an income-based repayment plan that would erase his default if he made nine consecutive monthly payments. He moved to a more affordable city, Austin, Texas, because he knew that Texas has no state income tax. Josuweit started by paying off his highest-interest loans, along with loans with the smallest principle balance loans. Then he opened a secure debit card that raised his credit score.
“Even though it’s been rough, defaulting ultimately made me financially savvier. I’ll know better than to take on a jumbo mortgage that I can’t afford. I got an early taste of what debt is like — and I hated it.”