Earlier this month, Rohit Chopra, the Student Loan Ombudsman for the Consumer Financial Protection Bureau (CFPA), issued a very useful report that moves us closer to figuring out what the real student-loan default rate is.
As I have tirelessly (some would say tiresomely) pointed out, the Department of Education's three-year default rate--13.4 percent--only measures the number of people who default on their federal student loans within three years after their repayment obligations begin. Many people default after the three-window that DOE measures, and these people are not counted in the default rate.
Moreover, millions of people aren't making payments on their student loans because they received deferments or forbearances that temporarily relieve them of their obligation to make loan payments. These people aren't counted in the official default rate either. Without question, many of these people won't pay back their loans, due in part to the fact that their loan balances are getting bigger because interest on these loans continues to accrue while the loans are in deferred or forbearance status.
The recent CFPB report tells us how many million people have loans in forbearance or deferred status, and this information gives us a clearer picture of the student loan crisis.
First of all, CFPB reported that 50 million people have federal student loans with outstanding balances. That's right--50 million!
CFPB also reported that 6.5 million people have loans in default--about 13 percent of those 50 million debtors. That figure roughly correlates with DOE's official three-year default rate of 13.4 percent.
But CFPB also reports that 3.4 million people have obtained forbearances on their loans and about 5.3 million people have obtained deferments. In other words, 8.9 million people have been temporarily excused from making payments on their student loans.
When we add the number of people in default to the number of people who aren't making payments due to deferments or forbearances, we have a total of 15.4 million people who are not making loan payments--30 percent of the people who have outstanding student loans.
Of course some of the people who obtained deferments or forbearances will eventually start making their payments and will ultimately pay off their loans. But I believe--and who can disagree--that most of those 8.9 million people who have temporary exemptions from making their loan payments will never pay off their loans.
Why do I believe that? First, as I just stated, most people with deferments or forbearances are seeing their loan balances grow because interest is accruing during the time they are not making loan payments. The longer these people wait to begin making loan payments, the harder it will be for them to ever pay off their loans.
Second, as Senator Tom Harkin's report on for-profit colleges documented, a lot of for-profit institutions are actively urging many of their former students to apply for economic hardship deferments in order to keep their institutional default rates down. If it were not for these college's "default management" activities, many more students who borrowed money to attend for-profit colleges would be formally categorized as defaulters.
CFPB has performed a useful service by reporting the number of people who are not making payments on their loans due to deferments or forbearances. It should now be clear to everyone that the percentage of people who will ultimately default on their student loans is at least double DOE's official default rate. The true default rate must be at least 25 percent--and for students who attended for-profit institutions, the default rate is probably closer to 50 percent.
This state of affairs cannot go on forever. Our economy simply cannot afford to operate a huge federal program that ruins the lives of a quarter of the people who participate.
Rohit Chopra. A closer look at the trillion. Consumer Financial Protection Bureau, August 5, 2013. Accessible at: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/