Student Loan Defaults Are Huge, Do We Know Who’s Not Repaying Their Debt?

Outstanding debt from student loan totals $1.3 trillion. That’s a big number and it isn’t going down because the number of student loan defaults is massive and growing yearly.

The nation’s student loan industry is nearly as large as the federal government’s largest mortgage program through the Federal Housing Administration. The federal government is responsible for issuing 90 percent of all student loans given — nearly $100 billion in federal student loans are offered every year.

The variety of federal plans through the Direct Loan programs is large. Available to students on all kinds of degree treks, whether post-graduate or a short-term certificate, student loan repayment terms are frequently more generous than what a private lender would offer.

The repayment terms are also extremely negotiable. Some repayment terms are based on fixed payments spread over decades. Others allow repayment to increase according to borrowers’ earnings. Others are set at 10 percent of adjusted gross income (after an exemption of 150 percent of the federal poverty guidelines). Some unpaid balances are forgiven after 20 years, or half that if the borrower is working in a nonprofit or government job. Deferments and forbearances are permitted to enable individuals to suspend payments for years.

It’s great that so many people are looking to better educate themselves, and it’s amazing that so many payment plans are available, but 8 million people are in default on their federal student loans today. That’s nearly 40 percent of all borrowers who are in default, delinquent, or using the forbearance and deferment options. That’s right: 40 percent of all borrowers are not paying back their loans.

What to do about it? Well, deciding a plan of action has hit a bit of a speed bump. Sadly, the government doesn’t know why the delinquency rate is so high because it’s not collecting the information needed to find out.

Reports suggest that many of the borrowers who default never even make the first payment on their loans. But it is impossible to analyze the data to better understand this issue. Some statistics also imply that a large share of defaulted loans are held by borrowers who left school over a decade ago, but many borrowers also leave default quickly and return to good standing. The lack of data means we do not understand what explains those very different patterns, and how policymakers might tailor solutions to these two groups.

Public policy researcher Jason Delisle told Congress that being able to accurately collect the information is halfway to solving the problem of delinquent debt, and to formulating a policy to tackle it.

How to deal with the problem of unpaid student loans and the toll it takes on the federal budget, the economy overall, and an education system that may not be properly serving its students is critical. Delisle made several suggestions on how to get the right information. He urged Congress to take a closer look.

Far too much is at stake for lawmakers to be satisfied with the existing data. Taxpayers and students deserve better than policies developed through anecdotes and assumptions.

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