Who is defaulting on student loans

Even after accounting for types of schools attended, family background characteristics, and post-college income, however, there remains an percentage-point Black—white disparity in default rates.

For many years, federal budget forecasters expected the student loan program to earn a profit—until recently. And that figure uses an arcane and unrealistic accounting method required by federal law. And that largely excludes the cumulative losses already anticipated on loans issued prior to More adults between 18 and 35 are living at home, and fewer of them own homes than was the case for their counterparts a decade or two ago.

But these trends are mostly due to these folks entering the work force during the Great Recession rather than due to their student loans. Income-driven repayment plans are designed to ease the burden of student loans for those borrowers whose earnings are not high enough to afford payments under the standard plan.

Basically, these plans set the monthly loan payment based on family income and size. Unlike the standard repayment plan, any outstanding balances in the income-driven repayment plans are forgiven after 20 or 25 years of payment.

There are currently 8. Even admirers of the income-driven repayment approach say the current approach in the U. Still, many experts see an improved version of income-driven repayment schemes as a promising approach for the future.

Some Democratic candidates are proposing to forgive all Bernie Sanders or some student debt. Former Vice President Joe Biden would enroll everyone in income-related payment plans though anyone could opt out. After 20 years, any unpaid balance would be forgiven. Pete Buttigieg favors expansion of some existing loan forgiveness programs, but not widespread debt cancellation.

Forgiving student loans would, obviously, be a boon to those who owe money—and would certainly give them money to spend on other things. But whose loans should be forgiven? Loan forgiveness proposals also raise questions of fairness: Is forgiving all or some outstanding loans fair to those who worked hard to pay off their debts?

Is it fair to taxpayers who did not attend college? Voter Vitals Non-partisan, fact-based explainers on important issues for American voters. Multimedia Videos and podcasts on key election issues. About Policy For Media. The federal government offers borrowers two options to return a defaulted loan to good standing without having to pay off the balance.

Borrowers may rehabilitate their loans—a process in which they make nine consecutive on-time payments of an agreed-upon amount. After that, the loan returns to good standing and the history of default is removed from their credit report. The record of delinquency, however, remains. Alternatively, defaulters can consolidate their loans to leave default. To do so, they must either make three on-time payments or agree to a payment plan in which their monthly bill is tied to their income.

Borrowers can consolidate a single loan one time, unless subsequent consolidations involve at least one loan that was not already consolidated out of default. The Education Department only produces one institution-level report on defaults—a measure of how many borrowers defaulted within three years of entering repayment. They make possible three types of analyses: demographic breakdowns of defaulters; longitudinal tracking of how long it took borrowers to default; and what happened after defaulting.

These recently released data, as well as other, more comprehensive data on default and loan repayment, can assist policy efforts to lower persistently high default rates.

For instance, IDR plans—which take the sting out of monthly payments by tying what a student pays to their income—have been hailed as the answer to student loan default. The Government Accountability Office found that not only are borrowers on IDR plans less likely to default than their peers on other repayment plans, but also that students who are most at risk of default often do not take advantage of the IDR option.

Similarly, no available data allow policymakers to evaluate the effectiveness of economic hardship deferment or voluntary forbearance—two options that allow borrowers to temporarily stop payments—or to determine if these options help individuals get back on track or are simply waypoints to default. While it may not be possible to eliminate every last default, seeing so many students fail to repay despite the array of repayment options and benefits suggests that policymakers could do a better job investigating what successfully keeps students in good standing on their loans.

Understanding the problem is the first step. Student loan defaulters largely resemble the students who occupy campuses today. Students who entered college in the school year, took out a federal loan, and defaulted at some point are older, lower-income, and more likely to be financially independent than both borrowers overall and those who did not default. Defaulters are also more likely to be students of color. Table 1 presents more detailed information on the characteristics of defaulters.

The right-most column shows the percentage-point difference between the share of defaulters in a demographic category versus the overall set of loan borrowers. For instance, it shows that while 19 percent of all students who took out a federal loan started at a private for-profit college, 38 percent of all defaulters began at that same type of institution—a difference of 18 percentage points.

For instance, nearly 90 percent of defaulters also received a Pell Grant at one point; 70 percent came from families where neither parent earned a college degree; 40 percent came from the bottom quarter of the income distribution; and 30 percent were African American. By contrast, white students make up 60 percent of federal loan borrowers, but just 44 percent of defaulters.

Typical media narratives portray borrowers with large debts as those most likely to struggle. Table 2 shows the median debt load for students who defaulted on their loans broken down by attainment status, the first type of institution attended, and race.

In almost every case, the median loan defaulter owed thousands of dollars less than their peers who did not default. Only 5 percent of defaulters borrowed for graduate education. New data also shed light on how far borrowers made it into their programs. Table 3 shows the median number of postsecondary credits earned by students who defaulted across a variety of characteristics. Surprisingly, the median dropout earned 24 credits, the equivalent of two semesters at what is considered a full-time load.

This is notably higher than previous default analyses. A ACCT study, for example, found that nearly 60 percent of defaulters from Iowa community colleges accumulated less than 15 credit hours.

There may be a technical reason for this discrepancy. Table 4 presents data on how defaulters performed in their courses as measured by GPA on a four-point scale. Overall, defaulters tended to have lower GPAs than nondefaulters. For instance, the median dropout who defaulted had a 2. These tables show that while defaulters may not be top students, they are often capable of doing college-level work.

Institutions and policymakers should reexamine the factors that cause students to drop out and determine whether the reason why a student dropped out affects their odds of defaulting. For instance, policymakers should assess how default rates compare across borrowers who drop out due to poor academic standing, versus those who drop out due to an unexpected economic shock such as a broken car or loss of child care.

Your defaulted loans will appear on your credit history for up to 7 years after the default claim is paid, making it difficult for you to obtain an auto loan, mortgage, or even credit cards. You will also be ineligible for assistance under most federal benefit programs. Subsidized interest benefits will be denied.

You may not be able to renew a professional license you hold. You may be prohibited from enlisting in the Armed Forces. And of course, you will still owe the full amount of your loan. Preventing Default Borrow as little as possible. Default rates increase with overborrowing. If your total debt will be more than twice your expected starting salary, you are borrowing too much and should consider attending a less expensive college.

Make sure you understand your options and responsibilities before taking out a loan. Prepare a checklist of all your loans, including the name and phone number of the lender, the type of loan, the amount of the loan, the interest rate, and especially any due dates or deadlines.

Make your payments on time. Notify your lender or servicer promptly of any changes that may affect the repayment of your loan, such as change of address, graduation or termination of studies, leaves of absence and transfers to another school. If you encounter temporary financial difficulties, consider applying for a deferment or forbearance on your loans. Ask your lender about these options while you are still making payments, before you default on your loan.

If you are having trouble making payments due to a more permanent income deficit, your lender may be able to suggest alternate repayment options, such as extended repayment, graduated repayment, income sensitive repayment, income contingent repayment and income-based repayment. Consider using a consolidation loan to combine all of your educational loans into one big loan.

If you have both federal and private education loans and can afford to make the required payments on only one loan, try to avoid defaulting on the federal loans.

The federal loans have more flexible repayment options and harsher penalties for default. Deferments During deferment, the lender allows you to postpone repaying the principal of your loan for a specific period of time.

Most federal loan programs allow students to defer their loans while they are in school at least half time. For Perkins Loans and Subsidized Stafford Loans, no interest accrues during the deferment period because the federal government pays the interest.

Students can postpone the interest payments on such loans by capitalizing the interest, which increases the size of the loan. Deferments are commonly granted for students who are enrolled in undergraduate or graduate school, disabled students who are participating in a rehabilitation training program, unemployment and economic hardship. Deferments are not granted automatically.