Student Loan Reckoning: 7 Million Are In Default

[IIOY]

Nearly 7 million Americans have gone at least a year without making a payment on their federal student loans, a high level of default that suggests a widening swath of households are unable or unwilling to pay back their school debt.



As of July, 6.9 million Americans with student loans hadn’t sent a payment to the government in at least 360 days, quarterly data from the Education Department showed this past week. That was up 6%, or 400,000 borrowers, from a year earlier.



That translates into about 17% of all borrowers with federal loans being severely delinquent, a share that would be even higher if borrowers currently in school who aren’t yet required to repay were excluded. Millions of other borrowers are months behind but haven’t hit the 360-day threshold that the government defines as a default.


Severe delinquencies are rising despite the sharp drop in unemployment over the past year and a big push by the Obama administration to enroll borrowers in programs that lower their monthly payments. Delinquencies on other types of debt such as credit cards and mortgages have fallen. And shorter-term defaults on student loans have declined over the past year.



The latest figures highlight how student debt—which has tripled over the past decade to $1.19 trillion, according to the Federal Reserve Bank of New York—has quickly become a crushing burden for more Americans.



Derek Lance, 31 years old, says he had gone more than a year without paying down his student debt, which now stands at about $70,000. At the time of his payment lapse, he had been paying high rent in San Francisco and was making little in his job. “I figured I wasn’t going to be able to make payments, so I kind of just brushed it off to the side,” said Mr. Lance, whose loans covered college and grad school.



After learning that his mother, a co-signer on the loans, might become the target of debt collectors, he moved into a cheaper place with roommates and began making payments last year. The freelance charity fundraiser and marketer is now paying $1,100 a month toward his student debt.



“There’s plenty of people out there who feel like they’ve been ripped off, and the notion of repaying the loan for 10 or 15 years is just impossible for them,” said Jason Delisle, a higher-education expert at the New America Foundation, a think tank. “If this were happening in the corporate sector it would be an economic catastrophe, if you had defaults of that rate.”



The growing number of yearlong-plus delinquencies carries sizable implications for borrowers, taxpayers and the economy. Economists have warned about student-debt defaults damaging borrowers’ credit standing, constraining their ability to borrow for things like cars and homes for years. That in turn would hamper the economy, which relies heavily on consumer purchases for economic activity. Delinquencies also drain government revenues, which are used to make future loans.



Those in default owe relatively little—a median $8,900, according to the Education Department. Other figures show that borrowers who attended for-profit schools—who are disproportionately minorities—account for a disproportionate share of defaults. Many borrowers in default dropped out of school, leaving them with debt not the degree that typically boosts incomes.



Conversely, student debt has helped other households earn bachelor’s and advanced degrees, boosting their lifetime incomes and quality of life.



A significant number of borrowers in default never made a single payment, experts say.



Navient, one of the servicing companies that collects debt payments on behalf of the government, said that 90% of federal borrowers who default never talk to the company in the year in which they default, despite repeated attempts from the company to reach them.



The Obama administration didn’t address the defaults in releasing the data. Instead, Education Department officials pointed to figures they said showed progress in getting some Americans current on their bills.



Shorter-term defaults—those in which borrowers have gone between 31 days and 359 days of making no payment—declined over the past year, the agency said. Among those who borrowed directly from the government—the majority of those with federal loans—the share who are least 31 days behind fell to 21%, from 23% a year earlier. A similar drop occurred among borrowers under a now-defunct program that provided government guarantees for privately made student loans.



Education Secretary Arne Duncan said those declines resulted from rising participation in income-based repayment plans, which lower borrowers’ monthly bills by tying payments to their incomes. Enrollment in the plans surged 56% over the past year among direct-loan borrowers.



“The fact that more and more borrowers are taking advantage of the opportunity to cap their monthly payments is a good sign,” Mr. Duncan said.



The administration has heavily promoted the plans, including through emails to borrowers, over the past two years in an effort to stem defaults. The plans set payments as 10% or 15% of their discretionary income, defined as adjusted gross income minus 150% the federal poverty level.



But research shows that the biggest beneficiaries of the plans are likely to be big-ticket borrowers—mainly those who went to graduate and professional schools and who are likely to earn more than those who only have bachelor’s or who dropped out.



Denise Horn, an Education Department spokeswoman, said the administration is trying to reach defaulted borrowers to make them aware of options to lower their bills, such as income-based repayment.



“We are doing everything we can to be responsive to students’ needs,” she said. The agency has set up a system for borrowers to file complaints about servicers who aren’t responsive, and it is analyzing student-debt trends to glean more details of defaulters.



The government also contracts with companies to track down borrowers in default and has the power to garnish wages, tax refunds and even Social Security checks for repayment.



The income-driven repayment plans carry risks for both borrowers and the government. Many borrowers’ payments aren’t enough to cover the interest on their debt, allowing their balances to grow and threatening to trap them under debt for years.



At the same time, the government could be left forgiving huge amounts of debt if borrowers stay in the plans. The government forgives balances after 10, 20 or 25 years of on-time payments, depending on the plan.



The administration maintains that the overall student-loan program will generate long-term profits for taxpayers, but it has recently revised down revenue estimates by billions of dollars due to growth in the income-driven plans.



The administration is trying to grapple with long-term defaults. It’s not clear why so many borrowers aren’t making payments, though there are several theories.



Christa Labanara, a counselor for the nonprofit American Student Assistance who is in contact with defaulted borrowers, says many are unemployed and in low-paying jobs and juggling bills. “They’re not finding the jobs that they thought they were going to get paid,” Ms. Labanara said. “It’s like, ‘What comes first? Does my mortgage come first or my student loans?’ ”



Data on defaulted borrowers is limited. Mr. Delisle organized a focus group of such borrowers to learn their circumstances. Some borrowers won permission from the government to temporarily postpone payments, and planned to eventually repay. But when they saw the balances grow quickly, they felt hopeless, he said.



Others felt their schools didn’t deliver on their promise of a quality education. When they didn’t get they jobs they expected, he said, some refused to pay. “They feel like they didn’t’ get what they paid for,” Mr. Delisle said.


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[summer]

Aug 22, 2015 13:50:33 GMT -5 IIOY said:

Others felt their schools didn’t deliver on their promise of a quality education. When they didn’t get they jobs they expected, he said, some refused to pay. “They feel like they didn’t’ get what they paid for,” Mr. Delisle said.


link

Um....if I remember correctly, this was not an option given to me during my exit interview.  I believe they said I would have to pay unless I died or lost the use of, not one, not two, but all four limbs.  

[aurora]

After learning that his mother, a co-signer on the loans, might become the target of debt collectors, he moved into a cheaper place with roommates and began making payments last year. The freelance charity fundraiser and marketer is now paying $1,100 a month toward his student debt.

He had no idea what co-signing a loan meant? What kind of information are students given when taking out a loan?

[IIOY]

Aug 22, 2015 14:38:51 GMT -5 summer said:

Aug 22, 2015 13:50:33 GMT -5 IIOY said:

Others felt their schools didn’t deliver on their promise of a quality education. When they didn’t get they jobs they expected, he said, some refused to pay. “They feel like they didn’t’ get what they paid for,” Mr. Delisle said.


link

Um....if I remember correctly, this was not an option given to me during my exit interview.  I believe they said I would have to pay unless I died or lost the use of, not one, not two, but all four limbs.  

Did you miss the "dissatisfied with your purchase" clause in your student loan papers, too?

[Velar Fricative]

90% never reached out to the loan company for help???

Well, they'll get theirs. The government doesn't mess around. They will take every penny from you for those loans if they have to, though I'm surprised the article doesn't mention whether they're doing so already (or maybe it has to be at least a year in default for garnishment to occur?). I truly feel for people choosing between food and housing and student loans but ignoring student loans doesn't make them go away.

And OMG at that dimwit in San Francisco. And at everyone who thinks they don't have to pay if they didn't like the education they received.

[penguingrrl]

Aug 22, 2015 14:55:50 GMT -5 aurora said:

After learning that his mother, a co-signer on the loans, might become the target of debt collectors, he moved into a cheaper place with roommates and began making payments last year. The freelance charity fundraiser and marketer is now paying $1,100 a month toward his student debt.

He had no idea what co-signing a loan meant? What kind of information are students given when taking out a loan?

I got no information at all when I took out student loans. Quite literally the financial aid office sent papers saying I qualified for $x in loans, $y in scholarships and $z in grants and therefore my part of the cost was $xxxx. There was no in person counseling whatsoever. My exit interview consisted of logging online and e-signing something saying I know I have to pay my loans back.

[josieposy]

I just put mine on forbearance for one year and will pay some interest during that time so that we are in better shape to pay them when the kids are done with daycare. Why do so many people walk away and put blinders on instead of looking at options?

[kadams767]

OMFG. I feel for people in really tough spots with student loans, I truly do. But wouldn't we all love to live solo in San Francisco and freelance? Give me a break. And BS to not realizing that they could go after his mom.

[miniroller]

Aug 22, 2015 15:29:11 GMT -5 kadams767 said:

OMFG. I feel for people in really tough spots with student loans, I truly do. But wouldn't we all love to live solo in San Francisco and freelance? Give me a break. And BS to not realizing that they could go after his mom.

And I agree with feeling a bit of sympathy. Nonetheless, this was money that you borrowed; figure out a way to pay it back. I did when I was in a tough spot, & continue to factor SL's into my budget because that was money that I BORROWED!
The irresponsibility is very disheartening to me, & I wonder what, if anything, has been done (by Navient, etc.) to correct this forbearance nightmare.

[turboteal]

I just finished paying my federal loans last month (MM: snowballing that payment and will pay off the non-federal loans next month, woohoo!). I got an email from Navient the other day saying congrats on paying them off, can you tell us how you did it? Apparently just sharing my story on their website/materials can inspire others to do it too! I don't think a lack of success stories is what's stopping people from paying. 

[jodinia]

I work with Ms. Labanara, and it is true the stories and situations we have heard over the years regarding loans.

[penguingrrl]

Oh, and I will say that no amount of poor counseling matters. I took out the loans and I've always kept them in good standing. While H was in school our HHI was low enough that our repayment was $0 based on IBR, so we weren't paying but also weren't in default. If I pay them off as currently slated they will be paid off a year before my oldest starts college. And that was for state school with a scholarship.

[ttt]

Aug 22, 2015 13:50:33 GMT -5 IIOY said:

Derek Lance, 31 years old, says he had gone more than a year without paying down his student debt, which now stands at about $70,000. At the time of his payment lapse, he had been paying high rent in San Francisco and was making little in his job. “I figured I wasn’t going to be able to make payments, so I kind of just brushed it off to the side,” said Mr. Lance, whose loans covered college and grad school.

Ummm yeah that's not how it works. Welcome to adulthood. 

[ttt]

Maybe if Derek here would spend less time having lucid daydreams and more time, oh i don't know working, he would be able to pay back some of his loans.

twitter.com/D_Rock84

ETA: also, isn't sailing expensive?? 

[epphd]

Aug 22, 2015 16:36:58 GMT -5 ttt said:

Maybe if Derek here would spend less time having lucid daydreams and more time, oh i don't know working, he would be able to pay back some of his loans.

twitter.com/D_Rock84

ETA: also, isn't sailing expensive?? 

friend's boat? DH crewed on a faculty member's giant sailboat when we were grad students in SF.

though... we were paying our loans, living with roommates and earning stipends at the time. Things Derek didnt' think to do, I guess.

[penguingrrl]

Aug 22, 2015 17:16:24 GMT -5 pennypenny said:

Aug 22, 2015 15:15:22 GMT -5 penguingrrl said:

I got no information at all when I took out student loans. Quite literally the financial aid office sent papers saying I qualified for $x in loans, $y in scholarships and $z in grants and therefore my part of the cost was $xxxx. There was no in person counseling whatsoever. My exit interview consisted of logging online and e-signing something saying I know I have to pay my loans back.

Well this is definitely a case of the old way was better. I started college in 1997. I had to have a face to face interview with any co-signers before I could complete my student loan paperwork. Everything was explained. And you had a face to face exit interview to remind you of everything you signed for in the beginning and what would happen, etc. Who is really reading everything online before the e-sign? And how does the computer know that the person really understands what they are signing? Who do ask questions to when you don't understand?

I actually wonder if it's partly a size of the school thing and partly timing. I started college in 2000 and graduated in 2004, so not that far behind you. But I was at Rutgers, which is a huge school. I never once set foot in the financial aid office and couldn't have told you where it was located. I do think they should require in-person interviews to get loans and exiting school, but I suspect that there weren't enough staff members there to handle that.

[secretlyevil]

Aug 22, 2015 15:29:11 GMT -5 kadams767 said:

OMFG. I feel for people in really tough spots with student loans, I truly do. But wouldn't we all love to live solo in San Francisco and freelance? Give me a break. And BS to not realizing that they could go after his mom.

Right? Everyone's circumstances are different and there are people out there with real struggles who have my sympathies. But to just blow off loans because you didn't like the end result? Nope, I truly don't understand how people are so clueless.

ETA: All that being said, there's some very dysfunctional about the system.

[overture]

I feel similarly about this as I do about people who walked away from their houses because they were underwater.

Just because an investment isn't paying off like you thought doesn't absolve you of the fact that you borrowed the money.

[pistolshrimp]

Aug 22, 2015 13:50:33 GMT -5 IIOY said:

Derek Lance, 31 years old, says he had gone more than a year without paying down his student debt, which now stands at about $70,000. At the time of his payment lapse, he had been paying high rent in San Francisco and was making little in his job. “I figured I wasn’t going to be able to make payments, so I kind of just brushed it off to the side,” said Mr. Lance, whose loans covered college and grad school.



After learning that his mother, a co-signer on the loans, might become the target of debt collectors, he moved into a cheaper place with roommates and began making payments last year. The freelance charity fundraiser and marketer is now paying $1,100 a month toward his student debt.



.....



Others felt their schools didn’t deliver on their promise of a quality education. When they didn’t get they jobs they expected, he said, some refused to pay. “They feel like they didn’t’ get what they paid for,” Mr. Delisle said.


link

I've started typing my response out for this three times, but can't seem to get my thoughts together. Articles like this and comments like the above from Mr. Lance infuriate me. The student loan debt crisis in this country has the potential to be crippling for years to come, yet no one seems to be taking it seriously. I think a lot is due to attitudes like Mr. Lance's. 

My current loan total is higher than Mr. Lance's, my payments have always been current. I know that there are cases where people have to default due to no fault of their own, it pisses me off that people choose to default because they need that expensive apartment, need to live life in the expensive city, think they need, need, need when in actuality it is want, want, want. It's stories like these that make millennials out to be self-absorbed, selfish assholes to older generations.

My graduate education was nothing like I expected it would be and was a huge disappointment. I'm not making anywhere near the money I thought I would be making. To bad, so sad for me I've still gotta pay it back. I'm not asking for my loan to be forgiven, it is my responsibility. What I would like to see are more refinancing options, ability to pay extra to the principle, etc. Real-life options that still require the borrower to take responsibility for their debt. I wish articles would focus more on people that are doing everything they can to stay on top of their debt and are still feeling the effects - i.e. inability to save for retirement, etc. Not those that "OMG, can't afford their student loan payment on top of their Brooklyn rent, dinner and drinks every night, and weekend getaways!"

OK, I have no idea if this makes any sense but I'm hungover and it has my blood boiling. Fuck you Derek Lance, you are a douche.
 

[sugarglider]

I think the people in this article are not terribly sympathetic, but this is still a huge issue.

My SL debt after law school was average for new grads. The exit interview tool said that I should have a salary of $240k based on my debt load. I do not have that salary, nor do the vast majority of first year lawyers. "Best case" is typically $160k + bonus. Anything above that is an outlier.

For this year, I've done IBR (based my my stub-year income), but if I don't refinance, my payments will be roughly 1/3 of my take home on a 20-year repayment. I don't regret the choices I've made to get me to this point, but the cost of higher ed has gotten out of control.

[emilyj]

Counseling? Ha. In my experience, when I took out loans for grad school, it was my financial aid office giving me the form and saying "You're qualified for $X, sign here." X being double what I needed. When I balked and said I didn't need that much, their response was "But you qualify." Oh. Ok.

I left school with half of the debt I could have had, because I refused a portion of the loan. The process to do that every year was headache inducing.

I would feel better about loans if students understood they didn't need the whole thing, or had a concept of what their actual expenses would be. I've heard undergrads on my campus make mention of their loan $ funding fancy dinners, spring break trips, or random road trips because "the money is just there."

[njw]

Aug 22, 2015 16:01:57 GMT -5 turboteal said:

I just finished paying my federal loans last month (MM: snowballing that payment and will pay off the non-federal loans next month, woohoo!). I got an email from Navient the other day saying congrats on paying them off, can you tell us how you did it? Apparently just sharing my story on their website/materials can inspire others to do it too! I don't think a lack of success stories is what's stopping people from paying. 

Just out of curiosity, about how much did you owe?

Only because I owe a ton and have been unable to pay them for a long time.  Granted, I'm not just ignoring them, they've been in forbearance and I pay interest when I can.  We live off a new teacher's salary and another fairly low salary for the area we live in.  My lowest payment they offer is like $500 a month and we just can't do it right now.

[aurora]

Aug 23, 2015 9:12:47 GMT -5 sugarglider said:

I think the people in this article are not terribly sympathetic, but this is still a huge issue. ...

I do agree that student loandebt is a huge issue overall. Clearly there are issues with how information is conveyed as well as with borrower attitudes (not all!). I mean, in an ideal world we'd have fully educated borrowers who understand all of the implications of the loans as well as have all of the correct info about what they're likely to earn when they graduate. But in reality the latter is fuzzy and many 18-year-olds don't have the financial experience to know when things don't seem quite right.

And as long as there is this imperfect knowledge/experience mix, capitalism isn't working as it should and it's allowing costs to skyrocket beyond what is reasonable for the likely salary.

[overture]

As someone who was in college recently (I started in 2008 and graduated last year...yes, the scenic route), I went through probably an hour long online session of entrance counseling before I signed the promissory note, and another hour of online exit counseling upon graduation. It was not optional. Entrance counseling emphasized that you should only borrow as much as you need, covered how to pay interest while still in school, etc. Exit counseling covered your repayment options, how to sign up for a different payment plan, and how to apply for deferment or forbearance.

The session seems to have been produced by the federal government, so I don't think I'm special in this. Are that many people taking out private loans? Federal borrowers are not left in the dark. Maybe they choose not to think about it and just assume they'll be making enough not to have to worry about it, but the information is there, and it's given directly to you.

[ggirl]

They couldn't find anyone else to showcase the problems with the system? I can think of dozens examples of people struggling to pay loans, and they work full time and keep paying on them monthly just to avoid default.

[sugarglider]

Aug 23, 2015 10:07:19 GMT -5 aurora said:

Aug 23, 2015 9:12:47 GMT -5 sugarglider said:

I think the people in this article are not terribly sympathetic, but this is still a huge issue. ...

I do agree that student loandebt is a huge issue overall. Clearly there are issues with how information is conveyed as well as with borrower attitudes (not all!). I mean, in an ideal world we'd have fully educated borrowers who understand all of the implications of the loans as well as have all of the correct info about what they're likely to earn when they graduate. But in reality the latter is fuzzy and many 18-year-olds don't have the financial experience to know when things don't seem quite right.

And as long as there is this imperfect knowledge/experience mix, capitalism isn't working as it should and it's allowing costs to skyrocket beyond what is reasonable for the likely salary.

But this doesn't result from mere capitalism. This results from seemingly limitless federal loans (ie, PLUS and GradPLUS) that cannot be discharged in bankruptcy. There is little incentive to keep costs low, and little incentive to deny students loans. Capitalism relies on incentives and disincentives. The system we have created is the source of this problem because it changes what it incentivizes.

[sugarglider]

Aug 23, 2015 10:42:38 GMT -5 overture said:

As someone who was in college recently (I started in 2008 and graduated last year...yes, the scenic route), I went through probably an hour long online session of entrance counseling before I signed the promissory note, and another hour of online exit counseling upon graduation. It was not optional. Entrance counseling emphasized that you should only borrow as much as you need, covered how to pay interest while still in school, etc. Exit counseling covered your repayment options, how to sign up for a different payment plan, and how to apply for deferment or forbearance.

The session seems to have been produced by the federal government, so I don't think I'm special in this. Are that many people taking out private loans? Federal borrowers are not left in the dark. Maybe they choose not to think about it and just assume they'll be making enough not to have to worry about it, but the information is there, and it's given directly to you.

This existed for me in law school (2011-2014) but not undergrad (2002-2006).

[kadams767]

Aug 23, 2015 11:06:09 GMT -5 sugarglider said:

Aug 23, 2015 10:42:38 GMT -5 overture said:

As someone who was in college recently (I started in 2008 and graduated last year...yes, the scenic route), I went through probably an hour long online session of entrance counseling before I signed the promissory note, and another hour of online exit counseling upon graduation. It was not optional. Entrance counseling emphasized that you should only borrow as much as you need, covered how to pay interest while still in school, etc. Exit counseling covered your repayment options, how to sign up for a different payment plan, and how to apply for deferment or forbearance.

The session seems to have been produced by the federal government, so I don't think I'm special in this. Are that many people taking out private loans? Federal borrowers are not left in the dark. Maybe they choose not to think about it and just assume they'll be making enough not to have to worry about it, but the information is there, and it's given directly to you.

This existed for me in law school (2011-2014) but not undergrad (2002-2006).

I think this is an institutional thing, then. I was in undergrad 1999-2003, grad school 2003-04 and then law school 2004-2007 and I had the mandatory counseling (entrance and exit) for all of my degrees and sets of loans (3 degrees and 2 different universities).

[vlagrl]

I have mine thru sallie mae and they have always been flexible with payment (deferment, forbearance, income based payments, graduated payments, interest only payments). They would rather see you pay something than nothing. I don't have any sympathy with people whining and not making payments.

[tacosforlife]

Aug 23, 2015 9:12:47 GMT -5 sugarglider said:

I think the people in this article are not terribly sympathetic, but this is still a huge issue.

My SL debt after law school was average for new grads. The exit interview tool said that I should have a salary of $240k based on my debt load. I do not have that salary, nor do the vast majority of first year lawyers. "Best case" is typically $160k + bonus. Anything above that is an outlier.

For this year, I've done IBR (based my my stub-year income), but if I don't refinance, my payments will be roughly 1/3 of my take home on a 20-year repayment. I don't regret the choices I've made to get me to this point, but the cost of higher ed has gotten out of control.

Statistically, even the $160k jobs upon graduation are outliers. Very few new grads actually land jobs at big firms.