The Real College Debt Problem

The Consumer Financial Protection Bureau recently did an investigation of America’s $1 trillion student loan burden. The organization reports that slightly fewer than 10 percent of all student loans are in default, meaning students aren’t making payments.

According to a piece in the Chronicle of Higher Education:

More than 9 percent of that amount is in default.

Over all, about seven million borrowers have defaulted on federal or private student loans, while about a third of federal direct-loan borrowers have sought to delay or lower their repayments….

This does not really represent any dramatic shift. The default rate was 8.8 percent in 2009, so the problem doesn’t seem to be getting much worse.

The bureau also looked at the repayment plans the 15 million borrowers of federal direct loans students who are making payments (or who are not in default) use. The majority of debtors, two-thirds of them, are on “standard 10-year repayment plans.” About 1.58 million are in income-based repayment programs.

According to Rohit Chopra, the CFPB’s Student Loan Ombudsman, the relatively high default rate is trouble because,

Defaulting on a federal student loan has serious consequences. Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order.

Chopra points out that many debtors could probably avoid financial ruin by making better decisions. “If borrowers were aware of and able to easily enroll in income-based plans through their servicer, many federal student loan defaults could have been avoided.”

Well yes, but a more serious effort to address the structural problems that result in 15 million people holding $1 trillion worth of student loans would probably be a better solution. Student loans aren’t a problem just because Americans don’t know which repayment plans are available; they’re a problem because they’re starting their professional lives in the debt. Debt is a problem even if people are making regular payments.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer