DOE's three-year student-loan default rate masks an ugly reality--millions are in default
I have a couple of comments about the Education Sector report. First, it is very late in the day to call attention to the fact that DOE's reports on student-loan defaults are woefully inadequate. I called attention to that problem more than 15 years ago in an edited book on student loans. Nevertheless, I am glad Mr. Gillen highlighted this problem again.
Second, Mr. Gillen's report, although useful and professionally prepared, understates the deficiencies in DOE reports on student loan defaults. In my opinion, DOE's reports are so inadequate as to border on fraudulent misrepresentation.
As The Education Sector report explains:
[DOE] considers a loan to be in default if the borrower is more than 270 days behind on payments. The default rate is the percentage of a school's borrowers who enter repayment during a fiscal year and default within three years. . . Only subsidized and unsubsidized Stafford loans are included in the default rate calculation. The default rate calculation ignores Parent Plus, Grad Plus, and Perkins Loans.
So--first off, a borrower must be delinquent on a student loan for nine months to even be counted as a defaulter. In reality, DOE is only measuring defaulters during the first two years and 3 months of the repayment period, not three years, since anyone who defaults within 270 days of the end of the measuring period is not counted as a defaulter.
Second, and more importantly, DOE's default rate does not include people who received economic hardship deferments during the measurement period--people who are exempted from making their loan payments due to dire economic circumstances like unemployment. We know some for-profit institutions encourage their students to obtain economic hardship deferments as a way of keeping institutional default rates down.
DOE does not report on how many people are receiving economic hardship deferments, how long those deferments typically last, or how many people who get a deferment ever begin making their loan payments.
And that is no small matter. I have written about the Hedlund bankruptcy case, in which a man received a series of economic hardship deferments on his student loans over a period of many years and was never in default. About 20 years after taking out his loans, he filed for bankruptcy. Although he had been excused from making payments by his economic hardship deferments, his loan size had nearly doubled due the fact that interest had accrued over the years.
The Hedlund case is an indication that there may be a lot of people who are on long-term economic hardship deferments who are not making loan payments and whose total indebtedness is growing. Without knowing that number, we really can't say what the true student-loan default rate is.
DOE's anemic student-loan default rate also does not include people who are making monthly payments under income-based repayment plans. About 1.2 million people are making student-loan payments under IBR plans, and many are making payments that aren't large enough to pay down the balance of their debt. In fact, some are seeing the amount of their debt grow because their payments don't cover accruing interest on their loans.
In my opinion, people who have economic hardship deferments that last more than three years and people in IBR plans whose loan payments are so small that their debt is actually growing are in default. Not technically, of course--but the reality is that many of these people--probably most of them--will never pay back their student loans.
So what's the true student-loan default rate? DOE says it is 13 percent over the first three years of the loan repayment period. But measured over the life time of the loan repayment period, it is much higher. It's probably at least 35 percent, maybe higher.
That Tired Old Metaphor: Rearranging the Deck Chairs on the Titanic
I've used this tired old metaphor before, but forgive me for repeating it. Education policy makers are not dealing with the enormity of the student loan crisis; they are rearraning the deck chairs on the Titanic.
Not long ago, the Bill and Melinda Gates Foundation awarded grants to 16 higher education policy groups, which were charged with making recommendations for improving the student-loan program. Entitled Reimagining Aid Design and Deliver (RADD), the project elicited 16 reports and a wide variety of recommendations. I did not read all 16 reports word for word, but I did read the executive summaries. I don't think any of the 16 reports mentioned the fact that DOE's student-loan default rate masks the reality of how many former students have defaulted on their loans.
In my opinion, most of the higher education advocacy groups, think tanks and professional organizations--organizations like the American Council on Education, the National Association of Student Financial Aid Administrators, and the Association of Public and Land-Grant Universities---are pretending that the status quo for the federal student loan program is both acceptable and sustainable--we just need to tweak it a bit.
Friends, the status quo of the student loan program is not acceptable and it's not sustainable. Student loan indebtedness totals $1 trillion; and it grows bigger every day. It's time to face the fact that this well-meaning program has ruined the lives of millions of college borrowers and that a big percentage of this trillion dollar debt is never going to be paid back.
Andrew Gillen. In Debt and In the Dark: It's Time for Better Information on Student Loan Defaults. Education Sector, July 2013. Accessible at: http://www.educationsector.org/publications/debt-and-dark-it%E2%80%99s-time-better-information-student-loan-defaults
Richard Fossey (1998). The dizzying growth of the federal student loan program: When will vertigo set in? In R. Fossey & M. Bateman (Eds.), Condemning students to debt: College loans and public policy. New York: Teachers College Press.
Richard Fossey & Mark Bateman, M. (Eds.) (1998). Condemning students to debt: College loans and public policy. New York: Teachers College Press.
National Assocation of Student Financial Aid Administrators (2013). Policy Themes in RADD Reports: A Summary Matrix. Accessible at: http://www.nasfaa.org/radd-event/