The default rate on federal student loans has risen by about 5 percent in the past year and 500,000 more borrowers have slipped into default, according to new statistics from the Department of Education (DOE). More than one in eight total outstanding loans is in default, and more than one in five borrowers who should actually be repaying their loans are a year or more behind.
The overall default rate on on taxpayer-funded student loans rose from 12.8 percent to 13.5 percent over the past year, the new data show. The effective default rate, which can be calculated by removing loans to students who are still in school or otherwise not expected to be making payments at this time, rose from 21.2 percent to 21.9 percent. The majority of defaulted loans come from a defunct lending system known as FFEL that used private banks as middle men in lending to students. But because that program was shut down in 2010, all of the increase in defaults comes from the DOE’s direct loan program. The number of direct loan recipients in default rose from 2.1 million to 2.5 million over the past year, the data show.
The same data release shows an encouraging jump in enrollment in federal programs that let workers repay their student loans more gradually. The number of borrowers using income-based repayment (IBR) programs such as Pay-As-You-Earn has doubled in the past year, reflecting a push to publicize the programs by the Obama administration. But while 10.5 percent of borrowers who are actively repaying their loans are now enrolled in one of these programs that links monthly payments to monthly earnings, there is substantial reason to think that the programs remain under-enrolled. Defaults still outnumber IBR enrollees by more than three-and-a-half to one.
“We know that the rising cost of higher education and growing levels of student debt hit home for millions of Americans,” DOE Assistant Press Secretary Denise Horn said in an email. “In addition to expanding income-based repayment options and reaching out to struggling borrowers to make them aware of the flexible options available to repay their debt, the Department has also created tools such as the College Scorecard and Financial Aid Shopping Sheet so that students and families can understand their options and choose the college that provides them with the best value. In addition, we are also focusing on keeping college costs down by developing a college ratings system that will push innovations and systems changes that will benefit students and families.”
Numerous other policy proposals could help address the broken college financing system for future generations and cancel out some of the race and class advantages that tilt the educational playing field. The simplest would be to pay for every American to go to public universities — an idea that may seem starry-eyed but which would cost less than what the government spends now on the current system of college subsidies. Sen. Elizabeth Warren (D-MA) has proposed slashing student loan interest rates dramatically. Other, less radical approaches to financing higher education for future Americans include small savings accounts that have been proven to drastically increase a kid’s chances of getting to college.
But those forward-looking solutions wouldn’t necessarily do much for those who the system is failing today. The generation that owes more than a trillion dollars in student loans today and is defaulting at higher and higher rates need more immediate solutions.
What’s more, rising default rates are only part of the picture. Millions more student loan borrowers are delinquent on their loans, meaning they are 90 days behind on payments but not yet in default. The official delinquency rate vastly understates the real shape of delinquencies, according to a Federal Reserve Bank of New York study published in April.
The “effective delinquency rate” calculated in that study intentionally excludes those still in school, in post-graduation “grace periods,” and graduates enrolled in IBR programs. By ruling out those categories of borrowers who are not expected to be actively reducing their outstanding loan balances, the effective delinquency rate provides a more accurate picture of the success or failure of graduates who should be paying down their loans if the system is functioning properly. The study’s findings indicate that the system is badly broken: Over 30 percent of borrowers who should be repaying their loans are delinquent, as compared to the 17 percent delinquency rate shown in official data.
The Fed data includes private loans as well as those charted by the newly-released federal numbers, so trying to draw direct comparisons to the new default and IBR statistics for taxpayer-funded loans would be tricky. But taken together, the 30 percent effective delinquency rate overall and the rising default rate reported by the DOE illustrate that the system by which people who borrow to finance their educations are supposed to be able to climb out of debt is not working for a very large and growing share of Americans.
The debt overhang those borrowers face doesn’t only hurt them. The student loan crisis is also preventing millions of people from buying houses and cars and cell phones. The economy as a whole would benefit from taking some of the pressure off of these graduates.
One idea proposed by Center for American Progress experts is to start enrolling students in IBR programs automatically rather than waiting for the programs to continue their steady, gradual progress. Another is to set up a public-private partnership between the federal government and banks that would refinance existing loans at more affordable rates and even forgive some of the outstanding principal.
But the most immediate relief that lawmakers could offer to the 7 million people currently in default on their loans might be to let them declare bankruptcy. Years of legal maneuvering by debt collections companies has made it impossible to discharge student loan debt in bankruptcy, making educational debt more dangerous than credit card debt, mortgage debt, and most other forms of borrowing. If lawmakers restored borrowers’ ability to restructure or eliminate student debt in bankruptcy, they could unleash trillions of dollars in pent-up consumer spending that might reinvigorate the economic recovery.