The student loan default rate has risen for the first time in four years, according to the U.S. Department of Education.
The increase reflects the growing number of borrowers who simply can’t afford their loans. And some say it’s a sign that Dept. of Ed. policy is headed in the wrong direction.
How much the student loan default rate has risen
The Dept. of Ed.’s report examined the “2014 cohort default rate,” which measured the number of borrowers who entered repayment on their Federal Family Education Loans or Federal Direct Loans between Oct. 1, 2013, and Sept. 30, 2014, and then defaulted before Sept. 30, 2016.
Of the 5 million borrowers in that cohort, more than 580,000 defaulted on their loans — meaning they didn’t pay their loans for more than 270 days. That number equates to 11.5 percent of borrowers, up from 11.3 percent for the 2013 cohort.
It’s the first time the rate has increased in four years, after hitting a peak of 14.7 percent.
Although the increase is slight, the number of borrowers in default isn’t — a record 8.5 million, according to a press release from The Institute for College Access and Success (TICAS).
Put another way, out of every $10 in federal student loans, $1 is in default.
Why these student loan default numbers matter
The reason for the uptick is unclear, according to economists. And although it isn’t necessarily a cause for panic, it should be an impetus for making student loan policies more borrower-friendly.
Instead, some say the reverse is happening.
“Now is the time to be improving student loan policies and increasing oversight and accountability,” said Pauline Abernathy, executive vice president of TICAS. “But the [Dept. of Ed.] is doing the opposite.”
Among other things, Abernathy is referring to the Dept. of Ed.’s “regulatory reset” of two laws meant to protect borrowers who attended for-profit schools.
At these schools, default rates are disproportionately higher.
“Considering both borrowing and default rates, the likelihood of a student defaulting at a for-profit college is three times higher than at a four-year public college and three and a half times higher than at a community college,” reported TICAS.
Further complicating matters is the fact that, despite its promise to the contrary in early July, the Dept. of Ed. hasn’t approved any borrower defense to repayment applications, which forgive student loans in cases of fraud.
“The [Dept. of Ed.’s] rollback of critical protections and enforcement will only lead to more student loan defaults, higher debt burdens, and wasted taxpayer dollars,” said Abernathy.
How to avoid student loan default
Entering student loan default is no joke; it can affect your ability to rent an apartment or get a job and might eventually lead to wage garnishment.
If you’re struggling to pay your loans each month, take the following steps.
1. Enroll in an income-driven repayment plan
Under an income-driven repayment (IDR) plan, your payments are capped at 10 to 20 percent of your discretionary income. For some people, this means their payments drop to $0 per month.
Then, after you make payments on your plan for 20 to 25 years, your loans will be forgiven.
You’ll likely pay more in interest with IDR, and you’ll face a hefty tax bill upon forgiveness. But if you can’t make your loan payments each month, it can be a lifesaver.
Calculate what your payments would be — and how much interest you’ll pay — with our income-driven repayment calculator.
2. Seek forbearance or deferment
If you’re undergoing economic hardship and need a temporary way to pause your student loan payments, you might want to seek deferment or forbearance.
These programs allow you to pause your payments for up to three years under circumstances such as losing your job, enrolling in school, or having loan payments that equal 20 percent or more of your gross monthly income.
For unsubsidized loans, interest will continue to accrue during this period. Use our deferment calculator to get a handle on how much interest you’d owe before selecting this option.
3. Consider refinancing
If you have a strong income and credit score but are weighed down by a mountain of student loans, refinancing might help.
By refinancing your loans with a private lender, you could lower your interest rates and monthly payments. Just be aware that refinancing makes you ineligible for certain federal programs and protections.
The number of student loan defaults is increasing, but that number doesn’t have to include you. Take steps to manage your student loans — and prepare yourself no matter what comes next.
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