One crisis that isn’t getting very much attention is the U.S. student loan crisis, which is currently sitting at $1.4 trillion. The rate of defaults for these loans is on the rise, which further adds to the concern.
Over the past year, more than eight million federal loans have moved from a being in a good-standing position to being in default. This has occurred even though borrowers have been given the option of a flexible repayment schedule.
Initially, people enter college to get a post-secondary education so they can earn a higher income once all required courses are completed. However, having a college degree in today’s world does not guarantee anything when it comes to salary, job security, or how quickly a position is obtained.
Here are some keys facts to take away from the pooled college debt of $1.4 trillion.
Debt held by black students has a loan default rate that is four times higher when compared to white students. Also, if a black student were to drop out of college, they would still have a higher probability of defaulting on their loans. One reason for this is that black students have more difficulty finding employment compared to white students.
Based on previous studies in 1996, default rates typically rise between 12 and 20 years after the student first enters college. Based on previous default rates, it is believed that the 2004 college class will see a default rate of 40% by 2023.
The student debt market is the second-largest loan segment in the United States after housing-related debt (mortgages and home equity lines of credits). One interesting fact about the student debt market is that students with smaller debt loads are more likely to default than students with larger outstanding balances.
For-Profit College Student Debt Has the Highest Default Rate
There are two types of college loan programs offered to students through college, based on the type of education institute. Some colleges are run like a business and will only keep their doors open in order to generate a profit. These are for-profit colleges. Other colleges will be run by a public entity and provide education to as many students as possible. These are public community colleges.
Even though for-profit colleges are run as businesses, they are twice as likely to see a loan default from one of their borrowers compared to two-year public community colleges. When both loans are looked at from a 12-year view, for-profit colleges have a default rate four times higher than their community college counterparts.
What Is Concerning About a Default Payment and What Are the Consequences?
If a borrower misses nine months of payments, the loan is labeled as being in default. When a former student is in default, he/she incurs penalties and collection fees. In addition, there are extra interest charges that further add to the cost of education for the borrower. This results in the borrower being in a worse-off situation than before entering college.
Borrowers are not able to discharge their student loans through a bankruptcy proceeding if they are in default. There is also a possibility of a defaulted borrower seeing a deduction occurring in their work wages as the government will use that to pay the borrower’s debt.
Students become worse off when in a default position because their credit rating suffers. For the borrower, this results in other loans being charged a higher rate, such as a car or mortgage loan. There have also been instances where default borrowers have had their professional license suspended.
Conclusion: U.S. Student Loan Crisis
When a student first enters college, there are hopes of endless possibilities and no thoughts about debts that will be outstanding. This is one crisis that should be at the top of the agenda for politicians and decisionmakers within colleges.
If things remain at the status quo, with the trend of defaults continuing to rise, it’s possible the U.S. student loan crisis could cause an economic recession.
“The looming student loan default crisis is worse than we thought,” The Brookings Institution, January 11, 2018.
“For-Profit College Students Are Defaulting on Their Loans at an Alarming Rate,” TIME, January 12, 2018.
“40% of Student Loans Could Be in Default by 2023, and Here’s Who’s to Blame,” The Penny Hoarder, January 12, 2018.