“I graduated with a bachelor’s degree in communication studies in 1998,” writes “Simon” from Sacramento, Calif., a long-term unemployed college graduate who shared his debt story with the Project on Student Debt at the Institute for College Access & Success. “My parents never went to a university, and I really had no idea about how student loans worked, and why. I had no idea about the importance of choosing a specific major. All my parents told me is ‘you have to go to college, it’s important so you can get a good job.’”
“After college I moved back home from L.A. to Sacramento, and worked mostly in education as a teacher’s aid, because jobs were hard to come by. I resigned the $12.00/hour teacher’s aid job in 2007 because I hated working in education and wanted to get a job in a different field,” Simon continued. “I haven’t worked since. Not because I don’t want to, but because the only jobs I have been considered for are at gas stations, McDonald’s and at foster homes for emotionally disturbed children. I want to go back to school for a specialized degree, but my student loans are in default, and I literally have no income, savings, money or prospects and am in my mid-30’s living with my parents as a result.”
“I am desperate for some sort of miracle.”
For millions of federal student loan borrowers, they — like Simon‚ are also waiting for a miracle. According to a recent analysis from the Consumer Financial Protection Bureau (CFPB), nearly half of the outstanding $1 trillion in federal student loan debt is not in a stage of repayment. This is compounded by the fact that one in every eight borrowers are currently in default of their loans.
This threatens to undermine the federal student loan guaranty program, as well as undercut the economy as a whole. As reported by the Project on Student Debt, college graduates of the Class of 2011 carried an average student debt of $26,600, in light of a tough job market where professional and skilled careers have yet to rebound to pre-Great Recession levels. This translates to a higher level of unemployment and underemployment among college graduates and, as a result, less money being pumped into the economy via home and auto sales, retail sales and consumable purchases.
Repaying student debt
To make things worse, only a third of all federal direct loan borrowers utilize a structured repayment plan to pay back the loan, per the CFPB. Of the 15 million federal direct loan borrowers currently in repayment, deferment or forbearance, 9.84 million opt for the standard 10-year repayment plan. Only 1.58 million borrowers opted for a income-based repayment plan, while just 3.35 million sought an extended or graduated repayment plan.
“That can have serious consequences for their economic future,” said Rohit Chopra, the CFPB’s student loan ombudsman. “The troubling part is that many of those defaults could have been avoided if borrowers knew about their options and were able to easily enroll in them.”
The Obama administration has moved to create more attractive repayment options, including changes to Income-Based Repayment (IBR), which reduced the percentage of discretionary income that must be used to pay off the loan from 15 percent to 10 percent and reduced the repayment period from 25 years to 20. For borrowers who have loans that originated after Oct. 1, 2007, the administration has also introduced Pay As You Earn, which caps monthly payments to a set amount based on income and family size with loan cancellation after 20 years.
While a lack of public outreach and education about these opportunities can be blamed for the poor enrollment numbers, the complicated role private lenders play in the federal system can also be blamed. While the U.S. Department of Education became the sole student lender for the Direct Loan Program in 2010, many borrowers still have federally-guaranteed private bank student loans of which nearly one in every five borrowers are in default. While these loans are equally eligible for repayment adjustment plans, these plans cannot be secured directly from the lender — the loans must be consolidated under a federal loan package first.
Private student loans
Most experts agree, however, that the single largest factor is the private student loan market.
From Oct 1, 2012 to March 31, 2013, the CFPB has received 2,000 complaints about private student loans, ranging from problems with payment processing, to finding accurate information about loan status and repayment options, to accessing basic account information.
While private lending constitutes only $165 billion of the nearly $1.2 trillion national outstanding student loan debt, private loans are a significant part of the debt portfolios of borrowers with more than $40,000 in student loan debt. The CFPB estimate that 81 percent of all borrowers that had $40,000 or more in student loans at the time of the Great Recession also utilized private loans.
“[A] CFPB report noted that many borrowers of private student loans in periods of temporary hardship have been unable to negotiate affordable repayment plans with their lenders and servicers,” reads the May CFPB’s analysis, Student Loan Affordability. “Unlike federal student loans, private student loans generally do not allow for affordable repayment options, such as those where payments are contingent on borrower income. The lack of options may lead to damaged credit, potentially inhibiting the borrower’s future economic participation. In addition, even borrowers who were not struggling noted that they have been unable to refinance their high-rate student loans in order to lower their monthly payments.”
Inability to repay private loans or seek favorable rates can lead to default. Currently, there are 6.5 million borrowers in default, totaling a net loss of $89.3 billion. This amounts to roughly $13,740 per defaulted borrower. As current bankruptcy laws make it impossible to discharge any type of educational lending — private or otherwise — borrowers have little relief or protection legally from lenders.
Borrower advocates, however, hold that the best protection against default is education. The borrower should be warned before entering the loan agreement not only of the loan’s disclosures, but of repayment options, the differences in private and federal loans and the realities of having that much debt.
“Disclosures don’t remedy more fundamental problems, like that students don’t understand what it means to be $45,000 in debt when they graduate,” said Maura Dundon, senior policy counsel for the Center for Responsible Lending. “Being a more informed shopper is always a good thing.”
But, this offers little comfort to those currently buried by student debt. “Student loans have had a huge impact on my life,” said “Matthew” to The Washington Post. “I am not able to do the things most adults and newly married couples aim to do. I know buying a house will be a lot harder because of my loans. Starting a family will be delayed because of paying back student loans. My wife and I wish we could give back to the economy by purchasing a car and a house and starting a family, but we are extremely limited and handcuffed by our student loans.”