People With Low Student Debt Have the Most Trouble Paying it Back

A New York Fed report shows defaults are spiking earlier for new grads, and afflicting the people with the smallest debt burdens.
Anna Gutermuth/Flickr

Americans who carry college debt are increasingly struggling to repay it, and the people most likely to fall behind on payments are, surprisingly, the ones without much debt relative to their peers, a new report from the Federal Reserve Bank of New York shows.

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The Federal Reserve Bank of New York

In a blog post published Thursday, the New York Fed focused on the group of borrowers in the most desperate situations -- the ones in default, meaning they are at least 270 days late on loan payments.

College students whose loans became due in 2009 -- which means they likely left school around that time – were more likely to be in default than those with earlier loans. Twenty-six percent of this group ended up in default five years out of school. That means they're falling behind on payments much faster than previous cohorts the Fed looked at. 

More worrying is the economists’ finding that people who borrow the least are the ones who have the most trouble repaying their student debt. “The highest default rates, at nearly 34 percent, are among the borrowers who owe less than $5,000,” the report said. People with balances of less than $10,000 were the next most likely to default.  

What’s more, those who owe relatively little account for a large chunk of student debtors: 43 percent of Americans with loans due in 2009 owed less than $10,000. The researchers suggested that one reason smaller scale borrowers may be in worse shape is that they “may not have completed their schooling, or may have earned credentials with lower payoffs than a four-year college degree.”

Defaulting on a student loan can be catastrophic for borrowers, hobbling their credit scores and putting them at risk of having their wages or tax return offset to repay the debt. But the rate of defaults also has an impact on the economy, as a new generation of Americans moves from college to the workforce, buckling under the weight of debt. 

Low credit scores resulting from a default can make borrowing money for major purchases like a home more expensive, or nearly impossible. In a post yesterday, the New York Fed showed that for the third year in a row, 30-year-olds with student debt were less likely to take out a mortgage than their peers without it. 

Analysts don’t all agree that student loans are the culprit for young, indebted graduates’ growing aversion to buying a house, and it can be misleading to obsess over bloated averages when considering the extent of the student debt problem we’re in, since a few people with six-figure debt loads can skew the picture. But the New York Fed numbers reveal that having a lot of debt is not the only thing that can cripple a young debtor. Small loans leave a scar too. 

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