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.
References
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: http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html
Lockhart
v. United States, 546 U.S. 142, 126 S. Ct. 699 (2005).
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