Nearly 5 million Americans are far behind on their federal student loan payments, according to an analysis from The Wall Street Journal that uses data from the Department of Education. However, the looming student loan crisis might be worse than that, thanks to the conservative definition of “default” used by The Wall Street Journal.
So, why are so many borrowers defaulting on their student loans? And what are some of the potential impacts to the economy? Expert analyses paint a troubling picture of what could be next for the U.S. if borrowers continue to struggle with their student debt.
Number of borrowers defaulting on student loans on the rise
In the third quarter of 2017, the number of borrowers who haven’t made payments on their federal student loans in at least a year grew by nearly 274,000, bringing the total number of Americans in default to about 4.6 million, reports The Wall Street Journal.
However, the actual number of Americans in default might be even higher.
The Wall Street Journal’s estimate only includes borrowers who have missed at least one year of payments. But student loan borrowers in the Direct Loan Program (or its predecessor, the Federal Family Education Loan Program) are considered to be in default after missing nine months’ of payments, according to the Department of Education.
“The numbers continue to stagger the mind,” said Joe Saul-Sehy, a former financial planner and the host of the popular financial podcast Stacking Benjamins. “Throw in private student loans that are potentially in default, and the problem might be bigger than we think.”
Why do borrowers default on student loans?
On the surface, the economy and the labor market both look strong. The Bureau of Economic Analysis reports that gross domestic product (GDP) has risen through 2017, with an annual increase of 3.3 percent year-over-year at the end of the third quarter.
Further, unemployment is at 4.1 percent as of November 2017, according to the Department of Labor.
So, with a strong economy and plenty of jobs, why are borrowers falling behind on their student loan payments?
One reason might be continued wage stagnation. Data from the Atlanta Federal Reserve indicates that wages haven’t improved much in real terms — even for those with college degrees.
With student loan debt growing and wages stagnating, it could be increasingly difficult for borrowers to stay up-to-date on their payments.
Another concern for borrowers defaulting on student loans is the nature of those loans. A recent analysis from the New York Federal Reserve found that for-profit college students default at a higher rate than those at nonprofit schools. On top of that, students with loans from public two-year colleges also default at higher rates.
Those who leave school without degrees are more likely to default than those who complete their degrees. On top of that, economic background plays a difference, according to an analysis from the Center for American Progress (CAP), a left-leaning think tank. Those from lower-income families are more likely to leave school early with debt — and default later.
“You just put the lower-income folks in a very tough spot because it’s like you have to go to college, but if it doesn’t work out for you, not only have you not finished college, but you’re going to have debt,” Ben Miller, the author of the CAP analysis, told Marketwatch.
With all of these factors, it’s not much of a surprise that student loan defaults are on the rise.
How defaults on student loans could impact the economy
Borrowers don’t exist in a vacuum. Their inability to accomplish their financial goals could impact the economy moving forward.
“Once these borrowers end up in default, it impacts their credit,” Saul-Sehy said. “They have a hard time getting car loans and home loans.” A student loan default could remain on your credit report for up to seven years, reducing your buying power.
In an economy that relies heavily on consumer spending, he pointed out, that can make a difference going forward. With millennials unable to fuel the economy by borrowing, there could be a reckoning in the works.
In fact, the New York Fed sounded the alarm over homeownership earlier this year. It reported a 35 percent decline in homeownership among millennials with student loan debt.
Saul-Sehy also worries about the future. “In my financial planning practice, I saw what stress over debt can do to your decision making,” he said. “You tend to focus on the short term, and you neglect some of the longer-term choices that could help you later.”
Joseph Hogue, a former economist for the state of Iowa, told Student Loan Hero earlier this year that millennials’ reluctance to spend and take risks could lead to economic slowing down the road. He referred to the effect as a “leaky balloon” whose impacts would be gradual — but potentially devastating nonetheless.
What to do if you can’t repay your student loans
If you can’t repay your student loans, you don’t need to be a statistic. Saul-Sehy said that there are tools in place to help prevent defaulting on student loans.
“Income-driven repayment is one way to make your federal student loans more manageable,” he said. “Talk to your loan servicer about your options, and ask about income-driven repayment.”
If you’re already in default, it’s important to take steps to move forward. You can enter federal loan rehabilitation to get out of default. Once you’re out of default, it’s possible to get on an income-driven plan, consolidate your debt, or even refinance to a lower rate and payment.
With federal loans, you have some government-mandated protections and choices. If you’re trying to tackle a private student loan default, you might have fewer options. Saul-Sehy said you should talk to your lender as quickly as possible to see if there are hardship options.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|