Monday, November 10, 2014

Now We're Getting Somewhere: Jason Delisle and Clare McCann Published A Very Useful Essay on Student-Loan Defaults in Forbes.Com

As almost everyone knows, the Department of Education's annual report on student-loan defaults is not very useful.  Every autumn, DOE reports on the percentage of student-loan debtors from the most recent cohort of borrowers who default on their loans within three years of beginning repayment.  Last September, DOE reported a composite default rate of 13.7 percent, down a full percentage point from the previous year.

But of course, DOE's report does not tell us how many borrowers default on their student loans after the three-year period that DOE measures.   Nor does DOE's report gives us any information about the number of people who are not counted as defaulters because they received economic hardship deferments, even though those people aren't paying on their loans.

In short, DOE's annual reports don't tell us what we really want to know, which is this: How many people are not paying back their student loans?

Fortunately, Jason Delisle and Clare McCann published an article recently for Forbes.com that gives us some very useful information about what the student-loan default rates really are. Here are some of the things they found:

First, Delisle and McCann report that cumulative cohort default rates for recent cohorts of borrowers are disturbingly high.  Among students who attended two-year public and nonprofit colleges who began repayment in 2007, about one out of four is in default. Among students who attended two-year for-profit institutions and began repayment in 2007, more than one out of three (36 percent) is in default.

Delisle and McCann also looked at the federal government's budget lifetime default rate, which estimates default rates for cohorts of borrowers over a period of 20 years. "Across all school types," Delisle and McCann wrote, "the Department of Education reported that a little over one in five loans for undergraduate educations will default within two decades."

DOE is encouraging student-loan borrowers to enroll in one of several income-based repayment plans that DOE offers. These plans can lower borrowers' monthly loan payments because these payments are determined based on a percentage of borrowers' income and not the amount they borrowed.  Delisle and McCann wrote that the percentage of borrowers who participate in these plans has grown from 5 percent to 10 percent of people who are making payments on their loans.

But of course, many people in these income-based repayment plans are making payments that are so low that their payments are not covering the interest that is accruing. Thus, many borrowers who are making loan payments based on their income will see their loan balances go up and not down due to negative amortization.

Borrowers in income-based repayment plans may not care if their loan balances are growing because whatever they owe at the end of their repayment period (20 or 25 years) is forgiven. But taxpayers should care.

Delisle and McCann wrote "that the U.S. Department estimates that of about a quarter of borrowers in the most generous of these [income-based repayment] plans will walk away from $41,000 in unpaid loans under a loan forgiveness benefit, based on initial balances of $39,500."

In other words, a significant percentage of people who are enrolled in long-term income-based repayment plans will never pay off the principal of their loans, even if they faithfully make loan payments for 20 years.

The picture that Delisle and McCann have sketched for us regarding student-loan default rates is pretty sobering, and it is based on the federal government's own data. When we consider that the Feds' estimates of lifetime default rates and negative amortization rates are probably overly optimistic, we have real reason to worry.

Of course, we can kick this can down the road, so to speak, as the Obama administration is presently doing. By encouraging borrowers to sign up for long-term income-based repayment plans, the Department of Education is reducing borrowers' monthly payments, which may help keep default rates down. But if people in these plans are not paying off their loan balances, which many of them are not, taxpayers will ultimately wind up paying the bill for a student loan program that is out of control.

Even now, there are things we can do to avert disaster, but we won't begin thinking about these things so long as we are lulled into believing that the student-loan default rate is under control. But it is not under control, and we can thank Jason Delisle and Clare McCann for helping making the true state of affairs a little clearer.

References

Jason Delisle and Clare McCann. Who's Not Repaying Student Loans? More People Than You Think. Forbes.com, September 26, 2014. Accessible at: http://www.forbes.com/sites/jasondelisle/2014/09/26/whos-not-repaying-student-loans-more-people-than-you-think/?utm_content=buffer1e0e0&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer





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