This Is How Badly We're Managing Our Student Debt
Government-backed student debt is big business: About one in six U.S. adults has a student loan owned or guaranteed by taxpayers, and the feds pay their contracted loan servicers and debt collectors close to $2 billion annually to counsel borrowers on their repayment options and collect monthly payments on nearly $1.3 trillion of federal student debt.
The U.S. Department of Education updates the public every three months on how borrowers are faring with their federal student loans. Bloomberg crunched the numbers on where the federal student loan portfolio stood as of June 30. Here's what we found.
Fewer Borrowers Are Falling Behind
Late payments, when measured by loan balances in arrears, have fallen significantly in recent years. In 2013, a quarter of student loans were at least 31 days late. Delinquency rates have steadily dropped since then, falling to about 19 percent as of June 30.
The figure likely reflects the Obama administration's expansion of generous repayment plans that let borrowers make monthly payments based on how much they earn, rather than how much they borrowed, and improved service by federal loan contractors.
But Many Are in Distress
A closer look at the broader pool of borrowers expected to be making payments—everyone except students still in school or in mandatory six-month grace periods after leaving college—shows the improved delinquency rate isn't quite as rosy.
Less than $3 of every $5 is being repaid on time. More than 42 percent of loan balances are either delinquent, temporarily postponed, in default or in bankruptcy, or borrowers are seeking to shed the debt by convincing the feds that their disability prevents them from ever repaying what they owe.
Defaults Continue to Climb
More than 1.1 million borrowers defaulted on student loans direct from the Education Department last year.
It's even worse than it sounds.
The default figure understates the true amount of distress. The Education Department counts a borrower as being in default only once she has gone 361 days without a payment, and the Obama administration doesn't make public the number of borrowers who are defaulting on federal student loans made by other lenders in a since-discontinued bank-based program.
The White House has touted income-based repayment plans as the solution to halting the relentless rise in defaults. The administration's goal is a "zero default rate," Education Undersecretary Ted Mitchell said last year. But loan defaults are up 2.7 percent through the first three fiscal quarters of this year compared with 2015, federal data show.
More Borrowers Experiencing Payment Shocks
Borrowers are required to share their earnings information with their loan servicers annually if they are to keep making payments tied to their income, but not all borrowers do so, for reasons ranging from forgetfulness to servicer errors.
The result: much higher required monthly payments. About a quarter of debtors now enrolled in the government's income plans no longer are actually making payments based on their income, putting them at higher risk of default.
The Education Department previously seemed to blame servicers, promising to rewrite their contracts so they'd prioritize helping distressed borrowers over collecting payments. But it now says debtors are to blame. "Borrowers have a responsibility not to miss payment deadlines," said spokeswoman Kelly Leon.
Borrowers Are Taking Longer to Repay Their Debt
More than half the debt carried by borrowers is scheduled to be repaid more than a decade after the bills first came due—a reversal from four years ago, when most debt was scheduled to be repaid within 10 years.
This is largely due to greater enrollment in income-based repayment plans, which stretch out payments to 20 or 25 years. As a result, Americans are now carrying substantial amounts of student debt well into their 40s and 50s, according to the Federal Reserve Bank of New York.
Federal financial regulators and the U.S. Treasury Department have warned that high student debt burdens could dampen household consumption and reduce Americans' ability to take out new loans to purchase or invest in other items. In 2013, President Barack Obama himself issued an ominous warning. "Our economy can’t afford the trillion dollars in outstanding student loan debt, much of which may not get repaid because students don't have the capacity to pay it," he said.