Student Loan Debt and Default Levels Are Lower Since the Great Recession

Income-contingent repayment plans defer the day of reckoning; the three year limit on tracking loan defaults promotes a blue sky scenario.
By John Sandman ,

A study by the College Board,Trends in Higher Education, released last week, concluded that the debt levels and loan defaults that defined higher ed throughout the Great Recession have begun to stabilize. The report found that borrowing had declined for the fourth consecutive year. In 2014, the average undergraduate borrowed 9% less from the Stafford subsidized loan program than in 2010.

Some point to the decline in tuition increases at four-year public colleges, pointing to the 0.9% increase in 2008-09 and the 9.5% increase during the 2009-10 academic year, the latter being the zenith. But according to the study, public college tuition increased from $26,927 in 2008-09 to $32,405 in 2015-16, roughly 12%.While borrowing may have declined, student enrollment has declined also.

"I think the sharp increase in public college tuition was driven by big budget problems at the state level during the recession," said Stephen Dash, CEO of San Francisco-based Credible, a non-bank provider of student loan refinance solutions. "Lawmakers, even those who supported spending on post-secondary education, were forced to sign budgets that cut funding to schools. Now that tax revenue is picking up, particularly in states like California, states can stop cutting. Whether they ever give any of that money back [to higher ed] remains to be seen."

A larger concern is that tuition costs will still outpace inflation. Outstanding student debt is unlikely to decrease while this trend continues.

The College Board report noted that when room and board were factored in, costs spiked significantly, from $36,672 in 2008-09 to $43,921 at private, non-profit four-year colleges in 2015-16, a $7,249 increase, or over 15%. At public four-year colleges, costs including room and board went from $15,593 in 2008-09 to $19,548 in 2015-16, roughly a 20% increase.

"Along with tuition, we’ve continued to see a rise in other costs associated with college," said Dash. "Students and families of students should take a holistic view on the total cost of college. Ultimately, it is important to look at college as an investment. The first step is to compare all costs including tuition, room and board, with all of the benefits and weight it up. The second step is to work out how to finance the investment--and this depends on each family’s personal financial situation."

Scrutiny of federal student loan defaults ends three years after graduation, thwarting an accurate count of defaulted loans. Graduates can have up to three years' worth of forbearances and deferrals, and then another 270 days after those three years run out before their loans are classified as being in default. Interest capitalized on loans in forbearance.

Income-contingent payment plans, including Income-Based Repayment (IBR), Pay As Your Earn (PAYE), Revised Pay As Your Earn (REPAYE) and the Public Service Loan Forgiveness (PSLF) program can let borrowers delay the day of reckoning while having their loans classified as current in the event of unemployment, even while no payments are being made.

An eventual interest rate hike by the U.S. central bank, the Federal Reserve System, or the Fed, will be significant
. Rates charged on new Federal student loans are linked to rate on the U.S. 10-year Treasury note, which will go up with a rate increase. Rates on private student loans are often tied to benchmarks like the London Interbank Offered Rate (LIBOR), which also responds to any actions by the Fed.

"If interest rates are higher, it may deter students from taking student loans," said Dash. By the same token, he noted that it could result in students graduating with larger interest servicing requirements on their student debt.

The graduate with a loan--and a job--is in better shape than a student who does not yet have to make payments but will when school is over. "Borrowers who have already graduated have the opportunity to refinance before interest rates start to rise," said Dash. He added that because of the current low rate environment, borrowers "may be able to secure fixed-interest rate repayments at some of the lowest student loan interest rates that the market has ever seen."

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