Student Loan Default Rates Higher Than Mortgage Default Rates in 2014

Finance
Posted By Donna Fuscaldo on August 13, 2015 at 3:11 pm
Student Loan Default Rates Higher Than Mortgage Default Rates in 2014

As of 2014, the default rate among student loans stood at 13.7%. That compares to a mortgage default rate which was .89% last year. That begs the question – why can’t people pay back their student loans like their other debt?

While it’s easy to blame the economy, a tough job market, high debt and low wages, those aren’t the only culprits, according to research from New America Education Policy. In fact, New America found borrowers are more likely to be delinquent on a $50 payment than a $250 one. And while sudent loan debt is at a record high of $1.2 trillion, the people defaulting on their loans owe, on average, less than $10,000.

“If there is any one factor when you look at the delinquency and defaults, it’s a lack of information,” says Kevin Fudge, manager of Government Relations and Community Affairs at American Student Assistance. “Nobody is going to be delinquent with all the tools and options available to borrowers. It’s a question of who is taking advantage of the system and who is not.”

What makes student debt different?

Last year, New America’s Education Policy set out to find out why consumers treat student loans differently than other types of debt, be it a mortgage, car or unsecured loan. Through six focus groups, there was a common theme: a lack of knowledge about the loan and repayment amount.

student loan delinquency

Source: The Century Foundation

New America Education Policy said many focus group participants thought their monthly payments would be much lower than they actually are. That’s partly because with student loans, the monthly payment can’t be calculated when the student enters college. That’s in contrast to mortgages and car loans, where borrowers know from the start how much they will be required to pay back each month. Blow off the payments, and the vehicle will be repossessed or the bank will eventually foreclose on the home.

Another difference between student loans and other forms of debt? The borrower doesn’t have to start paying it back right away, so he or she doesn’t have to worry about the payments from day one. Borrow money to buy a new car or to purchase a home, and you’ll start paying it back as soon as it’s in your possession.

There are a host of government programs available to help struggling students pay back their debt. But one program – forbearance – New America found to actually put some students in even deeper debt. Forbearance is the most commonly used option among struggling students, because it defers the time you have to pay back the loan. While it can be the fastest and easiest way to make the loan current and suspend payments, interest typically accrues over the period it’s in forbearance, putting some people deeper in debt. “Whether participants were aware of those effects ahead of time or not, this made many of them more reluctant to repay, and exacerbated feelings that their education was not worth what they had to repay,” said Jason Delisle,  and Alexander Holt, a policy analyst, and the authors of the report. “The minimal hurdles for enrolling in forbearance also seem to enable borrowers to push student loans down on their list of bills to pay.”

That resentment toward student loans is another reason people are choosing not to pay them back. Not to mention, there is nothing tangible to show for all the costs, nor are there any immediate  repercussions.  “Many bills that people pay on a monthly basis are payments toward ownership of an asset, which can be seized if the borrower fails to make payments, or towards an ongoing and vital service such as a phone or a utility, which a provider can shut off swiftly in response to late payments,” said Delisle and Holt. “Failure to pay these bills results in a loss, whereas paying a student loan might feel like a loss in the sense that the borrower gains nothing from the payment because she has already obtained the service (her education) and it cannot be taken away.”

How you can avoid delinquency

While there are a host of reason why people are more willing to default on student loans as opposed to other forms of debt, there are equally numerous ways to avoid situations where you end up delinquent on your loans.  According to experts, it starts with being informed about your options.

Christa Labanara, a counselor at American Student Assistance, said the worst thing a struggling person can do is not seek help, because there is a lot of it out there. She pointed to one women she counseled who was facing a $450 monthly student loan payment on a teacher’s salary. The borrower had no clue she was eligible for income based repayment, or that she could apply for the public service loan forgiveness program, which would reduce her debt greatly if not altogether.  “Don’t be reluctant to call in for assistance,” says Labanara. “The government has great programs available. Don’t let the loans go into default. It can affect your future in a lot of ways.”

Donna Fuscaldo
Donna Fuscaldo is a freelance journalist hailing out of Long Island, New York. She has also written for Bankrate.com, Glassdoor.com, SigFig.com, FoxBusiness.com, Business Insider, Dow Jones Newswires and the Wall Street Journal.

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