Each year, more than one million student loan borrowers default on their payments.
The stock of school debt in the United States has tripled in the past decade and now exceeds $ 1.5 trillion, which is a greater burden on Americans than car or credit card debt.
For many, payments are unmanageable. By 2023, nearly 40% of borrowers are expected to default on their student loans. This is when a person hasn’t made a payment for their student loan debt for about a year, which triggers it to be sent to a third-party collection agency.
What types of student loan borrowers are at risk of defaulting? And what is the financial impact on them of doing so?
A new report from the Urban Institute, a progressive think tank in Washington, DC, answers these questions. The researchers analyzed the fate of borrowers who started repaying in 2012.
Who is in default on their student loans?
Federal loans come with a lot of protections that should make defaults rare, said Kristin Blagg, an associate researcher at the Urban Institute who specializes in education.
However, she learned, this is not the case: within four years of leaving school, nearly a quarter of borrowers had defaulted. “The defect is still quite common,” Blagg said.
She added: “I have found that these are borrowers who tend to be in financial difficulty.”
Defaulters are less likely than non-defaults to have types of debt that require risk assessment, such as credit card debt, auto debt, and mortgage debt. They are more likely than non-defaults to see their utility and medical bills also fall into collections.
Blagg said these additional debt pressures may explain, at least in part, why some borrowers might delay their student loan payments.
People who default on student loans are more likely to live in Hispanic and black neighborhoods, Blagg found. Previous research has shown that people of color are more burdened with their student debt because they have less parental wealth to draw on as well as higher unemployment rates.
Additionally, the average defaulter resides in an area where the median income is around $ 50,000, compared to around $ 60,000 for non-defaults.
Ironically, those with the smallest loan balances are the most likely to be unable to repay their debt.
According to the Urban Institute, nearly one in three people owe less than $ 5,000 for their failure to educate within four years, compared with just 15% of borrowers who owed more than $ 35,000.
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This is largely because many students who drop out of school have less debt, but are more burdened with it because they don’t have a degree, said Mark Kantrowitz, a student loans expert.
In addition, he said, “they often lack knowledge of options for dealing with debt, such as deferrals, abstentions, income-based repayment and loan forgiveness.”
The impact of the default
By the time a person’s student loans default, they will see their credit score rise to around 60 points, for an average of around 550, which is considered “very bad,” by the rating company Experian. Borrowers who stay up to date, on the other hand, average scores in the 600s.
A low credit score can force people to pay higher interest rates, delay buying a home, and even worry about being disqualified from certain jobs.
The government also has extraordinary collection powers with federal loans because they are one of the only debts that cannot be discharged in bankruptcy.
“The negative effects of defaults on student loans can be payday foreclosures, tax compensations and other methods of loan collection,” said Elaine Griffin Rubin, senior contributor and communications specialist at Edvisors. “In addition, some states suspend or revoke state-issued professional licenses, and some states suspend a driver’s license due to an overdue loan.”
To make matters worse, defaulting on your student loan debt also increases the balance, possibly due to collection fees and interest accumulation. After the default, the Urban Institute found, a student loan borrower will see their balance swell by about 10%.
These myriad consequences that accompany a fault can be difficult to overcome, Kantrowitz said.
“At best, it delays participation in the American Dream,” he said. “At worst, they are permanently excluded.”
What to do if you’re in the red on your student loans
If you’re having trouble paying off your loans, you should call your student loan manager as soon as possible, Griffin Rubin said.
You can find a more suitable payment plan, like one that will cap your monthly payments at a percentage of your income, or put your loans on hold, a temporary deferral of your debt. The former is better, Griffin Rubin said, because when you delay payments, interest accumulates and you end up with a larger balance.
If your loans are officially past due, call your loan manager and ask how you can get back in good standing. Borrowers are typically offered three options: loan repair, loan consolidation, or full loan repayment.
Credit rehabilitation is only offered once to borrowers. The program requires you to make nine “voluntary, on-time, reasonable and affordable monthly payments,” as determined by the loan manager, said Griffin Rubin. Then you will be out of default and the record should be removed from your credit history.
Borrowers could also consolidate their loans to get out of default, Griffin Rubin said.
“There are certain conditions the borrower has to agree to,” she added, “such as the type of repayment plan he will use to pay off the consolidation loan.”
Blagg said his findings should help policymakers and others understand which borrowers are most likely to need additional support throughout their repayments.
“There is a set of borrowers who are not reached by the policies that we have put in place and who can help borrowers avoid default,” she said.