The Student Loan Hole is Getting Deeper
The Consumer Financial Protection Bureau (CFPB) reported recently that the size of the student loan market is now close to $1.2 trillion. Of this amount, federal student loans alone comprise more than $1 trillion. Even more startling: about three-fifths of borrowers with Federal Direct Student Loans are not paying them back. Sure, some borrowers are not required to repay their loans yet because they are either still in school or in a grace period. But, 8% of borrowers in the Federal Direct Student Loan program are in default, meaning that a required payment has not been made in at least a year.
Counting both federal and private student loans, Rohit Chopra, the CFPB’s student loan ombudsman, estimates that more than 7 million borrowers are currently in default.
The increase in average student loan debt is due in part to the failure of grants to keep pace with the increases in college costs, shifting more of the burden of paying for college from the federal and state governments to families. Since family income has been flat, this forces students to borrow more or to shift enrollment to lower-cost colleges. This, in turn, leads to larger loan payments as a percentage of monthly income, making it more difficult to afford monthly loan payments, even with longer repayment terms.
As a result, student debt loads and possible defaults are bound to impact consumer economic behavior. Borrowers in these situations may find their wages garnished, income tax refunds withheld, and credit histories ruined. Borrowers with too much debt are unable to make major consumer purchases, such as homes and cars, and to save for retirement. Every additional dollar in student loan payments is a dollar less for other priorities.
Federal and private student loan borrowers who are experiencing difficulties in repaying their student loans should contact their lenders to discuss options for financial relief, such as alternate repayment plans or a temporary suspension of the repayment obligation. Borrowers have more options if they contact the lender before default.
The CFPB will continue to monitor the student loan market and will report on additional strategies student loan borrowers might consider.
In the meantime, borrowers should check out Edvisors’ Top Twelve Tips for Repaying Student Loans.