Federal Student Loan Defaults Totaled More Than 1.1 Million Last Year
Although 59% of Americans have completed at least some level of college, many people who have either dropped out – or never enrolled – say pursuing a degree is cost-prohibitive. In fact, college is now so expensive that most students cannot afford to work their way through school, leading many to take out student loans. As a result, 42.4 million Americans have federal student loans, totaling $1.3 trillion, which is a perfect recipe for student loan defaults.
Often, borrowers are overly optimistic regarding job prospects and future earning potential when taking out loans. For those who don’t make it through to get a degree, prospects are even worse: People who drop out of college are more likely to have student loan defaults than those who complete their education.
According to a report from the Consumer Federation of America, there were more than 1.1 million federal student loan defaults in 2016, which amounts to 3,000 defaults each day. When a loan is 270 days past due, it is generally considered to be in default.
Another noteworthy fact from the report: the average federal student loan borrower owes $30,650, a 17% increase from 2013.
But it’s not only students who may lack knowledge and a pragmatic approach to obtaining and repaying loans. A LendEDU survey of parents of students who are in college (48.95%), or were in the 11th or 12th grade (51.55%), reveals that many of them are naïve regarding student loans and loan debt. Excerpts from the survey include the following:
- Only 55.74% of parents know the difference between subsidized and unsubsidized student loans.
- Only 35.76% of parents could correctly identify the current interest rates on new undergraduate federal subsidized and unsubsidized student loans within 50 basis points.
- Only 40.06% of parents could correctly identify the current repayment term of a federal student loan.
- 46% of parents erroneously believe that parent PLUS Loans can be transferred to their child after graduation.
- 34% of parents erroneously believe that student loan debt can be refinanced through the Department of Education.
- 65% of parents erroneously believe that their child will be helped by federal student loan forgiveness programs after graduation.
These findings are problematic because at the same time that student loan default rates are rising, parents mistakenly believe that students will have a variety of options to reduce or eliminate their debt load. And a lack of knowledge, combined with an overly optimistic view could result in parents encouraging students to borrow more money than they need.
The rise of student loan defaults
There are a variety of reasons why the number of student loans in default continues to rise. “Borrowers are struggling financially and many have to balance student loans with other monthly bills,” according to Andrew Josuweit, CEO of Student Loan Hero. Depending on their major, some grads may not be able to find jobs in their field, and as a result, these grads are working lower quality jobs and earning lower wages.
Josuweit says borrowers may not be aware of other options, such as income-driven payment plans that temporarily lower payments to a monthly amount that borrowers can afford. However, he believes another factor is the rising cost of college. “The average student debt for the class of 2016 increased to a record high of $37,172, and I wouldn’t be surprised to see an increase again this year,” Josuweit says.
Parents engage in wishful thinking
While parents and students seem to be hopeful that they will be able to manage, reduce, or be released from their financial obligations, not all of the blame can be placed on them. For example, many are not aware of certain factors that may increase college costs. While college transfers are common, students who transfer often lose credits and money – and they end up staying in school longer, which requires more student loan debt. Students usually don’t know which classes will transfer until after they’ve been accepted to the new school and have enrolled in class. At that point, it’s too late to shop around for another college or university without missing a semester of school.
Also, institutions of higher education have been criticized for endorsing – or at the least not warning students against – some majors that may not lead to jobs or may result in jobs that don’t pay a living wage, prompting some economists to question whether colleges should have a money-back guarantee.
These are not the only reasons parents and students may be in the dark. “While there’s a good amount of misinformation and scams out there, I simply don’t think enough borrowers understand how these programs work and the math behind them,” Josuweit says. “And I don’t think they’re to blame for this misunderstanding either, as these repayment programs are very complex and not very intuitive.”
He does believe that some of the students will be able to get their student loans forgiven, but concludes, “It seems unlikely that roughly half of all student loan borrowers will qualify for some form of forgiveness.”
That’s because the criteria are quite narrow, typically affecting only a small segment of borrowers. For example, the Public Service Loan Forgiveness program is for grads who work in public service jobs, such as nonprofits or the government. Also, teachers who work at low-income schools, teach special education, or are in fields with a shortage of qualified teachers may be eligible. There are also special programs for physicians, nurses, and lawyers. Josuweit recommends using the public service loan forgiveness calculator to determine eligibility.
To avoid student loan defaults, and student loans altogether, more students turn to GoFundMe to pay for college. Also, some borrowers get student loans discharged in bankruptcy court. However, Nancy E. Bistritz, director of public relations & communications at Equifax, warns borrowers to protect their credit score at all costs. “Your credit report and credit score are important parts of your unique, financial picture – and may be indicators of your creditworthiness,” Bistritz says. “Creditors review credit reports to determine financial risk because it helps them understand if you will pay them back if they lend you money, extend you credit, or give you goods and services.”
A bankruptcy notation might be a red flag to most creditors.