A curious thing is happening. Despite an increase in the number of people enrolling in the government’s generous student loan repayment plans, more people are in default on their federal loans.
The White House has given Americans more options for repaying their loans so they can avoid default, expanding programs that cap monthly payments to a percentage of earnings, known as income-based repayment plans. Marketing campaigns and direct outreach by the Department of Education led to higher enrollment in the last year, yet the amount of people severely behind on their debt remains stubbornly high.
As of the end of September, 7.6 million people had not made a payment on their student debt in at least nine months, a seven percent increase over the same period a year earlier, according to data released Thursday by the Department of Education.
Defaults in the federal loan portfolio have been climbing for several quarters. It’s difficult to tell whether these are people defaulting for the first or second time because there is a troubling lack of public information, which the department says will change in the coming year as it releases more sets of data.
The rise in defaults also raises questions about the accuracy of so-called cohort default rates that are supposed to capture the number of people failing to make loan payments within three years of leaving college. A few months ago, the department said the rate was down from 13.7 percent to 11.8 percent. But officials said the rate was susceptible to “gaming behavior” by schools encouraging students suffering financial hardship to postpone payments through deferment or forbearance.
It’s also possible that a large number of people are falling into default four or more years out of school.
“The administration, for all of the focus they try to get people to put on this cohort default rate, these numbers make that whole line look silly,” said Jason Delisle, director of the federal education budget project at the New America Foundation, a think tank. “Clearly, what’s happening is people are just taking longer to default.”
There is no single reason why defaults keep creeping up, but many experts question whether student loan servicers, the middlemen who collect and apply payments, are doing enough to keep borrowers current. Researchers at the Government Accountability Office concluded that the gulf between participation in income-based plans and eligibility suggest that borrowers are not receiving sufficient information.
Servicers are paid millions of dollars by the federal government to essentially help people avoid defaulting on their loans, but the GAO found that even when they reach out to delinquent borrowers the information is often inconsistent. And while servicers make information about income-driven plans available through customer service representatives and Web sites, researchers say borrowers have to actively seek it out.
“Having more flexible income-driven plans doesn’t solve anything, if borrowers are never successfully contacted by their servicer,” said Pauline Abernathy, vice president of the Institute for College Access & Success.
As student debt approaches $1.3 trillion, the government’s flexible repayment plans have become critical in preventing people from defaulting on their loans. Defaulting on a student loan can severely damage a person’s credit rating, making it much harder to buy a house or car. It could also result in the loss of tax refunds or wage garnishment, since the government has extraordinary power to collect on federal loans.
In spite of rising defaults, there is some evidence that the government’s push to get people into one of its generous plans may be contributing to a lower rate of delinquencies in the first month of repayment.
Fewer people in the early stages of repaying their debt are falling behind, with the rate of delinquent payments of 31 days or more falling from 24 percent in September 2014 to 21.7 percent this September, according to the department. While it’s difficult to make a correlation, the number of people enrolled in income-based repayment plans during that time did increase 50 percent to more than 4.2 million.
Still, there are 180,000 additional borrowers more than three months late on their payments compared to last year. The amount of people whose loans have been transferred to collection agencies or debt management alone has more than doubled in the fiscal year ending in September, climbing from 60,000 to 140,000 people, according to department data.
“The uptick in borrowers who are more than 90 days late is bad news given the improving economy. But the reduction in early-stage delinquencies is hopefully a sign that the situation is getting better,” said Rohit Chopra, a senior fellow at the Center for American Progress.
The people who are falling the furthest behind on their payments have a relatively small total amount of outstanding debt, which supports the Federal Reserve Bank of New York’s findings that borrowers with less than $10,000 in student debt had the highest chance of defaulting. Often this group of people haven’t graduated and are unable to get a job that pays enough to cover their debt payments.
Economists at the the New York Fed released new data Thursday that confirms that both federal and private student loan borrowers are struggling to repay their debt.
Based on third quarter numbers, economists at the New York Fed said 11.6 percent of the $1.2 trillion in outstanding federal and private student loan debt is at least three months past due, up from 11.09 percent for the same period a year ago. While the uptick is nominal, the delinquency rate has hovered around that number for years and is higher than the percentage of late payments on all other forms of consumer credit — mortgages, credit cards and car loans.
What’s especially striking is that economists say their numbers are likely underestimated because about half of the student loans are currently in deferment, in grace periods or in forbearance.
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