C&B Notes

Student Loan Bust

The rate of non-performance among federally guaranteed student loans is staggering. Despite protestations by agency officials that the overall portfolio is in good shape, the federal government seems almost certain to realize principal losses on this loan book.

More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay.  The new figures represent the fallout of a decade-long borrowing boom as record numbers of students enrolled in trade schools, universities and graduate schools.  While most have since left school and joined the workforce, 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1, according to a quarterly snapshot of the Education Department’s $1.2 trillion student-loan portfolio.  About 1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt, meaning they had gone at least a year without making a payment.  Three million more owing roughly $66 billion were at least a month behind.

Meantime, another three million owing almost $110 billion were in “forbearance” or “deferment,” meaning they had received permission to temporarily halt payments due to a financial emergency, such as unemployment.  The figures exclude borrowers still in school and those with government-guaranteed private loans.  The situation improved slightly from a year earlier, when the nonpayment rate was 46%, but that progress largely reflected a surge in those entering a program for distressed borrowers to lower their payments.  Enrollment in those plans, which slash monthly bills by tying them to a small percentage of a borrower’s income, jumped 48% over the year to 4.6 million borrowers as of Jan. 1.

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The officials acknowledge that a large pool of borrowers have essentially fallen off the radar.  The Education Department has assembled a “behavioral sciences unit” to study the psychology of borrowers and why they don’t repay.  “We obviously have not cracked that nut but we want to keep working on it,” said Ted Mitchell, the Education Department’s undersecretary.  He said many defaulted borrowers dropped out of school and are underemployed.

Carlo Salerno, an economist who studies higher education and has consulted for the private student-lending industry, noted that the government imposes virtually no credit checks on borrowers, requires no cosigners and doesn’t screen people for their preparedness for college-level course work. “On what planet does a financing vehicle with those kinds of terms and those kinds of performance metrics make sense,” he said.

Some borrowers aren’t repaying even when they can. Research from Navient shows that borrowers prioritize other bills — such as car loans, mortgages and heating bills — over student debt.  A borrower who fails to pay down an auto loan might have her car repossessed; with student loans, there is no such threat.

Kristopher Mathews, 38 years old, is in deferment on about $11,900 in federal student loans.  During the recession he earned a certificate at a Michigan-based for-profit college that teaches media arts, but he wasn’t able to find the well-paying job in radio that he hoped for.  Mr. Mathews now works as a logistical analyst for an auto company, making $46,000 a year.  He says he devotes his income to caring for his family — he and his fiancée have three children — and paying off two credit cards and a car loan.  “With all the other necessities in life I just don’t have” funds to pay student debt, he said.  Once his deferment expires, he isn’t sure if he will feel obliged to pay down his loan.  “They promised me everything,” he said of his for-profit college.  “And I honestly have nothing to show for it except a piece of paper that doesn’t really do me any good.”

Most borrowers who have defaulted owe relatively little — a median $8,900, according to the Education Department.  The administration maintains that the student-loan program, as a whole, will generate a profit over the long term, but the risk is rising that its revenue won’t meet the administration’s projections.  Even many borrowers who are current on their loans are paying very little.  More than a third of borrowers on an income-based repayment plan had monthly payments of zero because their incomes were so low, according to a Navient survey last year.