Postponing Student Loans Masks Debt Problem
Source: Jason Delisle, "The Hidden Student-Debt Bomb," Wall Street Journal, December 31, 2014.
January 5, 2015
We hear a lot about the student debt problem, but just how bad is it? Of 7.1 million borrowers, 19.8 percent are in default on their student loans. But Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, says that the default rate doesn't tell the whole story.
When students are paying back loans, they have the option to postpone their loan payments for up to three years -- a benefit known as "forbearance." Loan companies grant forbearance relatively easily, says Delisle, and the debtor receiving forbearance is allowed to stop payments. During this time, he is placed in good standing. After the forbearance period is up, payments begin again (with higher monthly payments due to interest).
Delisle says enrolling in forbearance should be viewed as a problem in the same way that delinquency and defaults are, as the borrower simply stops paying. Indeed, forbearances have grown incredibly quickly in recent years. While just 12.5 percent of student loans in repayment in 2006 were in forbearance, that number has grown to 16 percent today. Of $778 billion in loan repayment, $125 billion is in forbearance.
In addition to forbearance, there is another option for borrowers wishing to suspend payments: income-based repayment plans. These plans, which have been heavily promoted by the Obama administration, allow borrowers to stop or reduce their loan payments based on their incomes. For example, Delisle says borrowers earning below 150 percent of poverty will not have to pay their loans back at all, while those with higher incomes will have to pay between 1 percent and 15 percent of their incomes. Outstanding loans are forgiven after a certain period of time, from 10 to 25 years.
Such programs are similar to forbearance, and Delisle says that required payments can be so low that the loan is never fully repaid. A 2012 estimate from the Obama administration concluded that these repayment plans will forgive an average of $41,000 per borrower. Enrollments in these programs are at a record high.
Even with these programs in place, default is trending upward. Delisle reminds readers that taxpayers are ultimately on the hook for the federal student loan program.
When students are paying back loans, they have the option to postpone their loan payments for up to three years -- a benefit known as "forbearance." Loan companies grant forbearance relatively easily, says Delisle, and the debtor receiving forbearance is allowed to stop payments. During this time, he is placed in good standing. After the forbearance period is up, payments begin again (with higher monthly payments due to interest).
Delisle says enrolling in forbearance should be viewed as a problem in the same way that delinquency and defaults are, as the borrower simply stops paying. Indeed, forbearances have grown incredibly quickly in recent years. While just 12.5 percent of student loans in repayment in 2006 were in forbearance, that number has grown to 16 percent today. Of $778 billion in loan repayment, $125 billion is in forbearance.
In addition to forbearance, there is another option for borrowers wishing to suspend payments: income-based repayment plans. These plans, which have been heavily promoted by the Obama administration, allow borrowers to stop or reduce their loan payments based on their incomes. For example, Delisle says borrowers earning below 150 percent of poverty will not have to pay their loans back at all, while those with higher incomes will have to pay between 1 percent and 15 percent of their incomes. Outstanding loans are forgiven after a certain period of time, from 10 to 25 years.
Such programs are similar to forbearance, and Delisle says that required payments can be so low that the loan is never fully repaid. A 2012 estimate from the Obama administration concluded that these repayment plans will forgive an average of $41,000 per borrower. Enrollments in these programs are at a record high.
Even with these programs in place, default is trending upward. Delisle reminds readers that taxpayers are ultimately on the hook for the federal student loan program.
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