The student loan default rate is estimated on average around 15% at any given time. This number should not come as a surprise with the higher education debt problem now at almost $1.6 trillion. Student loan debt has been on the rise as colleges have historically seen their tuition rates rise at about twice the rate of inflation.
Today, the average student loan is $32,731. According to Student Loan Hero, 69% of college students in 2019 took out student loans. Over the last two decades, the average student loan debt at graduation has increased by 86% for a Bachelor’s degree. Although a standard repayment schedule for a student loan is often presented on a 120 month or 10-year schedule, the true student debt average re-payment period for a bachelor’s degree today takes just over 21.1 years to pay off.
Federal student loans are the only type of loan where the lender really has no idea on the ability of the borrower to repay in the future. For this reason, in combination with tuition rates increasing on average at 8% per year, over one million student loans enter default each year.
Defaulting on student loan debt can result in serious consequences to a person’s financial life and well-being overall. Carrying a mountain of debt for higher education expenses for so many people is a stressful situation that leaves numerous borrowers choosing to default on their student loans.
How bad is the student loan default rate?
According to educationdata.org, the student loan default rate affects 9 million borrowers and their families. Within just one year of graduation, 40.9% of student borrowers had at least one delinquency while repaying their student debt and 11% of them are estimated to default on those loans in the first year.
There is some evidence that the rate of delinquency in student loans is slightly on the decline. However, I am not so sure this information is completely accurate. This is due to the Coronavirus Aid, Relief, and Economic Security Act. The government passed the CARES Act to help in many ways economically with the Coronavirus pandemic and this included assistance with federal student loans.
With the passing of the CARES Act, the interest rate for federal student loans was set to 0% and most federal loan payments were automatically put on hold. The temporary stop on student loan payments only applied to federal loans which over 91% of all student debt comes from. This pause has certainly been a factor in not truly showing what the most recent default rate is for student loans.
The reality with student loan default rates is 78% of borrowers will make at least one late payment in their first couple years of repayment.
What is considered in default for student loans?
For federal student loans, a person is considered in default after nine months of not paying. The delinquency countdown period starts the first day following non-payment. Within generally 15 days a written notice or collection letter is sent out notifying the borrower of a loan payment that is missed. Once the 9-month time is reached without a student loan payment, it is then declared as in default.
Who is most likely to default on student loans?
Although student loan default can affect just about anyone, research shows there are some borrowers that tend to default more than others. According to educationdata.org, student loan borrowers that went to a private 2-year and less than 2-year school are the most likely to default on education loans. The data furthermore shows 26.33% of the people that study Arts and Humanities at non-selective schools are the most likely to default on student loans.
Students that drop out of college also have a much higher likelihood to default on their education loans. With a dropout rate for college at 40%, according to the National Center for Education Statistics, this makes it 4.2 times more likely for a person that did not finish college to default on their student loans. About 63% of the student loans in default come from people that never completed their education.
Even though people that only attend two-year schools or drop out completely tend to be most likely not to repay their student loans, there are still plenty of college graduates that never reach the earning potential higher education should provide. Thus, these people are frequently also in default on their student loans. This list includes even doctors and lawyers that are thought of as having some of the highest earnings. The student loan default rate report through educationdata.org stated that 31.4% of law degree holders that fall behind in repayment are routinely delinquent.
What can happen if you default on student loans?
With most education loans being federal student loans, the first thing you need to realize is they are not going to ever go away without repayment. There is a reason the government is willing to lend just about anyone money for an education without knowing how the borrower is going to repay that loan in the future. Federal student loans can’t be discharged in bankruptcy and they will stay with a borrower until that person repays them or dies.
Becoming delinquent on federal student loans can have severe consequences that can last for years. The results you can potentially expect include:
- Eligibility for future financial aid will be lost. This may include further student aid, deferment or forbearance of payment, and even tax benefits.
- The entire balance of the loan with interest will become due.
- Wage garnishment and keeping tax refunds is a way the government might collect.
- Expect a lot of phone calls and mail regarding student loan default.
Not only will student loan default result in the lender trying to collect but the borrower’s credit rating will also suffer. This can increase the cost of buying a home or automobile with a higher interest rate and it could even potentially put the possibility of purchase on hold for some time. According to Experian the credit reporting agency, payment history is the most important factor in a credit score. It accounts for 35% of a FICO score. Just one missed payment can make an impact on a person’s credit rating. With nine months of missed payments on student loans to result in default, this can considerably hurt a student loan holder’s credit rating.
Don’t default on student loans.
Although it is simple to tell a person not to default on their student loans, missing payments and falling into default is much easier than it might seem for so many people that borrowed money for an education. With the average student loan balance over $30,000 and it not being uncommon to hear of people with $100,000 or more in student loan debt, it should not really come as a surprise that so many borrowers fall into delinquency.
The problem with higher education today is not that people borrow money to go to school but it is the amount of money required to pay for it all. All too frequently young adults have high expectations of earning potential after graduating college and this often falls short. The result is the difficulty in repaying student loans.
The gamble of borrowing for a college education is likely higher today than it ever has been. More people should be educated on the dangers of student loans and the reality that there are no guarantees of a high-paying job and longevity of a successful career with a college education. Furthermore, student loan borrowers need to be educated more on the dangers that come with borrowing money for education.
Defaulting on student loans often results in decades of financial issues including credit issues. These problems not only hurt interest rate borrowing capabilities but might also damage the potential of employment with an employer that looks closely at an applicant’s credit.
If you have student loans, don’t default on them. They will not go away and there are options, such as forbearance or income-only payments. Check with the lender and see what the options are. Defaulting on student loans can have severe consequences that last for several years. This will ultimately delay future personal and financial goals.