Wednesday, April 4, 2012

Student-Loan Defaulters: Not All of Them are Young

What is your image of the typical person who defaults on college student loans? Do you envision a young and irresponsible college graduate—someone who ripped off the federal student loan program by borrowing money to get a fancy college degree and then refused to pay it back? If so, your image would be inaccurate. A great many defaulters are from low-income families. Often they attended a for-profit institution that provided them with little value. And—this may come as a surprise—many student-loan defaulters are not young.
Researchers for the Federal Reserve Bank of New York examined the loan status of 37 million student-loan borrowers. Fourteen percent of these borrowers—approximately 5.4 million people, have at least one past-due student loan account. According to the Federal Reserve Bank report, only about 25 percent of student-loan borrowers with past due balances are under the age of 30. Forty percent of the student loan borrowers with payments in arrears are at least 40 years old. Almost one delinquent borrower in six (17.7 percent) are fifty years old or older. And about five percent of the people who are behind on their student loan payments are at least 60 years old (Brown, Haughwout, Lee, Mabutas, and van der Klaauw, 2012).
Why are so many people falling behind on their student loans in midlife or late in life? There are several explanations.
First, some of the older student-loan borrowers are people who borrowed money in midlife, expecting to increase their income potential. Then—due a variety of life circumstances, these borrowers did not earn the income they expected.  Maybe they became ill, lost their job, or were the victims of the recent economic downturn. As a consequence, some of these older student-loan borrowers fell behind on their loans.
Second, some of the nation’s older delinquent borrowers obtained economic hardship deferments on their loans, which temporarily exempted them from making regular student-loan payments. For a majority of these people, interest continued to accrue on their loans during the deferment period, causing their loan balances to grow.  Consequently, when these borrowers began making loan payments again after their deferments expired, they sometimes had a swollen loan balance that they simply could not repay.
Finally, I suspect some of the older people who are behind on their student-loan payments are people who had previously elected to pay off their loans under the income-contingent repayment option, which extends the loan repayment period out to 25 years. For some older people, the prospect of making student-loan payments during their retirement years may have seemed too daunting, causing them to stop making payments on their loans.
Older people who default on their student loans receive no dispensation from their loan obligations due to their age. In fact, in Lockhart v. United States (2005), the Supreme Court has ruled that a student-loan defaulter’s Social Security checks can be garnished.  Thus, some elderly people who failed to pay back their student loans will face severe financial hardship if they are totally dependent on Social Security income during their so-called “golden years.”
Obviously, no one would recommend a government policy that would make it easier for people to default on their student loans. Nevertheless, garnishing the Social Security checks of elderly student loan defaulters is an overly harsh measure. Congress needs to pass legislation that bars lenders and collection agencies from garnishing a student-loan defaulter’s Social Security check.
Brown, M., Haughwout, A., Lee, D., Mabutas, M., and van der Klaauw, W. (2012). Grading student loans. New York: Federal Reserve Bank of New York. Accessible at:

Lockhart v. United States, 546 U.S. 142, 126 S. Ct. 699 (2005).

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