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Student Loan Defaults Are Surging. But Why?

The number of Americans who defaulted on their student loan payments surged to roughly 4.6 million in the third quarter, signaling that the weight of the student debt problem remains heavy on some.
student loan default
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The defaults — defined as those who haven’t made a payment in at least a year — come despite unemployment being at a 17-year low and during a long streak of job creation.

For context, the nearly 5 million figure is double what it was four years ago. And that could spell trouble for those in default, for the taxpayers who have to pick up the slack and for the economy.

The number of Americans who defaulted on their student loan payments surged to roughly 4.6 million in the third quarter.Click To Tweet

Depressed Home Purchases and More

According to a report from the Federal Reserve Bank of New York, the student debt increase, along with tuition hikes, can explain between 11 and 35 percent of the 8-percentage-point decline in home ownership for 28-to-30-year-olds from 2007 to 2015.

Those who default face compounding interest payments, garnished wages, damaged credit and worse. The mounting defaults are causing governments to take serious actions. The New York Times recently reported that in 19 states, government agencies can seize state-issued professional licenses from residents who default on their educational loans, and South Dakota suspends drivers’ licenses, leaving defaulters in a predicament of how to work or get to work to pay off their loans.

Who Defaults?

According to the Center for American Progress, new data present the best picture ever accessible of who the defaulting borrowers are:

Defaulters are more likely to be older, be Pell Grant recipients, and come from underrepresented backgrounds than those who never default. The median defaulter takes out slightly over $9,600—just more than one-half of what the median nondefaulter borrows. Three out of every 10 defaulters are African American and nearly one-half of all defaulters never finish college.

According to recent research by the Federal Reserve Bank of New York, many borrowers who default dropped out of college before earning a degree or attended for-profit schools and community colleges. Students who attended private for-profit institutions have the highest default rates after their mid-20s, the report showed.

The Center for American Progress report concludes that the pain that radiates from the defaults in local communities could discourage future students from ever attending college.

Making a Smart Choice

Not getting a degree, however, is strongly correlated with lower earnings and higher unemployment. So students who want to go to college must make sure they’re getting the most bang for their borrowed buck.

The findings by the Federal Reserve Bank of New York are interesting, for example, when you look at PayScale’s most recent College ROI Report, which shows that public colleges are now typically the better choice in terms of financial outcomes post-graduation, than private colleges. If tuition increases and wage growth continue on their current trajectories, by 2025, the ROI gap between public and private colleges will grow to 24 percent, according to PayScale’s forecast.

Not So Gloomy

As dark as the picture may seem for students, the outlook for the federal student loan program has improved in some ways, The Wall Street Journal reported. The default increase in part reflects an overall increase in Americans entering the repayment cycle. As a share of all borrowers in repayment, new defaults fell in the third quarter compared with a year earlier.

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