Ever since America surpassed $1 trillion in student loan debt six years ago , everyone from economists to politicians to columnists have been wringing their hands about it.
There are plenty of reasons for the high level of debt, but one is significantly higher tuition costs. A college education has become more and more necessary, but because of the recession, college students took on debt right when wages were stagnating, making the debt harder to repay.
It’s no surprise then that many borrowers have stopped making payments, falling into a state of delinquency, or worse, default. So what is the student loan default rate, and why should you pay attention to it? Recent data shows that the three-year default rate is at 11.5%, up from 11.3% the year before.
When you convert that to actual people, here’s what it looks like: In October 2013, 5 million students started repaying their student loans, and just under 581,000 of those people defaulted as of 2016.
The History and Importance of the Default Rate
The three-year rate is a highly watched number, because it’s the figure the U.S. Department of Education uses to determine if colleges and universities qualify to receive federal student aid. In fact, it’s such an important number that colleges have hired consultants to manipulate their student loan default rates to make them look better.
While the default rates have trended down over the last two decades, the Great Recession that began in 2007 put pressure on borrowers and interest rates. Today’s rate is about twice what it was in 2006, but in 1990, during the dot-com bust, default rates topped 22% .
When you look more closely at the government’s reporting , you see that not all default rates are the same. For instance, rates at private colleges are lower than at public colleges and universities. Some of the worst default rates are associated with community colleges, and borrowers at non-profit colleges are defaulting at an alarming rate .
More than 98% of requests for loan cancellation came from students who attended a for-profit college.
The reason so many students sought relief was they felt defrauded or mislead, according to an analysis of education department data. Meanwhile, for-profit students tend to take on more debt and are less likely to find higher-paying employment that non-profit students enjoy.
Student loans are generally direct loans from the government, but a portion today are provided by private lenders. Before 2007 when financial regulation was lax, high interest rate, private loans were abundant. But since the Great Recession, several actions helped shore up the market, including requiring creditworthy co-signers.
Recently, the private student loan default rate has leveled off at a respectable 10% , similar to the overall default rate. But before the recession, nearly a quarter of borrowers who took out loans defaulted.
What is the Average Student Loan Default Period?
While the federal government focuses on the three-year default rate, it may be even higher over the life of the loan. Education Research Analyst Erin Dunlop Velez, with RTI International, crunched the numbers over 20 years and found the average loan default came around the five-year mark. What’s more, only half of undergraduate borrowers studied had paid back their loans in 20 years.
The Difference Between Defaulting on a Loan and Being Delinquent
While defaulting on a loan is the worst-case scenario, many more student loan borrowers have fallen behind on their payments.
Being in default depends on each lender, but borrowers participating in the Federal Direct Loan program or the Federal Family Education Loan program are considered in default if they miss nine months of payments. Borrowers can face a number of consequences if they default on a loan, including losing the opportunity to defer payments or choose a repayment plan.
It may also wreck your credit, and you may have to give up tax refunds or other federal benefits that the government will apply to your loan. Finally, your lender can sue you, and if that’s the case, you may even be responsible for the court fees.
A delinquency, while perilous, is a much better place to be since you still have time to start making payments again and restore your relationship with your lender. With federal student loans you’re considered delinquent if you miss just one month’s payment , and you will remain delinquent until you resume payments and make up the past due amount.
If it’s been 60 to 90 days since your last payment, the lender can report you to credit agencies, and that can affect your ability to borrow again. And with a bad credit report, you may have trouble getting credit cards, home loans, and even arranging for utilities or homeowner’s insurance.
Overall, roughly the same number of borrowers are late on their payments as default. The student loan delinquency rate was 11% at the end of 2017, but that figure may be lower than reality.
It doesn’t reflect the number of borrowers who are technically still behind on their payments but are in their grace period or getting other assistance.
What Options are Available to Make My Loans More Affordable?
If you are delinquent or think you may be heading that way, you can seek forbearance, which is a federal benefit to stop making payments for a period of time, however interest may still accrue. You can also seek out a federal income-based repayment program that ties your monthly payment to how much money you make.
If you’re not tied to one of those programs, you can refinance your student loans, which can trim your current interest rate. You can use the SoFi student loan calculator to see if refinancing makes sense to you.
Before you sign up to refinance, you should understand your current loans and term options. For example, you can choose a fixed-rate loan to keep your payments the same for the life of the loan. Or you can chose a variable rate loan, where the interest rate fluctuates with the market.
There are also different term options available when you refinance. A shorter term means you’ll get out of debt quicker but may have higher monthly payments, or you can lengthen the term with the goal of lowering your monthly payment, however with this option you will be paying more interest over the life of the loan.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment, Income Contingent Repayment, or PAYE.