The Student Loan Debacle–What a Mess

Until recently, much talk about student loans was fact-free: There simply weren’t publicly available figures worth paying attention to.

The official balance of student loans from the NY Fed were unreliable:

There was a bucket of random obligations called “Miscellaneous”, which included things like utility bills, child support, and alimony. And it turns out that if you went burrowing in that miscellaneous debt, there was actually a pile of weirdly-categorized student loans in there. [AG: And these mis-categorized student loans were not included.]

Meanwhile, the official cohort default rates from the Department of
Education were even more useless. Until recently, only the two-year rate
was reported. Moreover, those in forbearance or deferment were counted
as repaying their loans, and it took 270-360 days of not making
payments to be classified as in default. When combined with the grace
period, this means that to a first approximation, the “cohort default
rate” was not a default rate in any meaningful sense of the term, but
rather a measure of how many students never made any payment at all.

Some of that has changed now. Since the second quarter of 2011, the
New York Fed has begun to categorize student loans correctly, and their
credit report partner knows when students are late with payments (as
opposed to the useless “default rate”). It’s not perfect – e.g. there is
no accounting of the shadow debt, and we don’t know much about defaults
– but it’s a vast improvement over what we’ve ever had before. So the
new New York Federal Reserve analysis of student loans is well worth a

The main headline is of course the $870 billion outstanding balance.
Also noteworthy is the $85 billion that is held by those who are past
due. But what these numbers really illustrate is the human and financial
impact our bizarre student-loan system is having.

61 Percent Are Not Paying

As Edububble notes, 61% of folks with a student loan are not paying.
This includes a massive contingent (47%) in deferment (mostly current
students) or forbearance (mostly unemployed or under-employed?). To get a
pool of those that should be repaying, we’d ideally exclude just
current students, but that isn’t an option, so excluding both those in
deferment or forbearance indicates that 73% are repaying and 27% are
behind in their payments. To give you sense of how unhealthy this is,
consider that after the worst housing price crash in our history, 28% of
mortgages were underwater. That a comparable proportion of student loan
borrowers are in a sense underwater on their loans is absolutely

The Financial Quagmire

The 27% that should be repaying but aren’t account for 21% of the
relevant outstanding loan balance. Some of that will eventually be
repaid of course, but some of it won’t be and the lender (US taxpayers)
will face big losses as a result. This is yet more evidence that student
loans are a drain on public finances, and one more reason to begin the
overdue rethinking of financial aid programs.

Andrew Gillen

Andrew Gillen is a Senior Policy Analyst at the Texas Public Policy Foundation.

11 thoughts on “The Student Loan Debacle–What a Mess

  1. First do not use a private lender if you can get Stafford Loans still. If you truly are in Default (as opposed to delinquent) then you will not be able to get any more student loans until you rehabilitate those. That means you have to make 9 on time payments (over 9 months) to become eligible to borrow more Stafford loan funds. Second, student loans CAN indeed be discharged by a bankruptcy but they usually are not. The judge can decide whether or not paying the student loans back constitute an undue hardship. If not, then they stay. Make sure you really are in default. In order to get there you have to blow off 9 months of payments that were due. And if you can prove that you should have had a deferment and it’s the lenders fault for not recording it when other lenders did then that can get you out of default also. Stafford loans are not based on a credit history but a Financial Aid Administrator CAN refuse to certify the loan if they have a good reason to. A good reason would be something like a student telling the financial aid office I’m never going to pay these back . Bankruptcy by itself is NOT a good reason. And by the way, if you don’t get the loans discharged in the bankruptcy, you WILL end up paying them back though wage garnishment or your tax returns being kept by the government for the rest of your life so you might as well make it easier on yourself and pay them back on time and avoid the interest and late fees. Baron

  2. “Learning a skilled trade at 18, and not having to repay a $140,000 mountain of debt, looks better and better.”
    Too bad many public trade schools have been shut down and now people have to pay tuition in order to attend private trade schools incurring the same debt problem unless one wants to join a union. Of course the union dues paid in exchange for the offer of tuition relief eventually sap more cash out of one’s pocket than the loan scheme would have.
    Either way young people today are BONED. This is without even considering the Ponzi scheme Social Security is and what that drains from the meager paychecks of the youths.

  3. This is yet more evidence that student loans are a drain on public finances, and one more reason to begin the overdue rethinking of financial aid programs.
    Didn’t we not only fail to do this rethinking in 2009, but made the problem worse when the federal government completely took over the student-loan-provider role and exposure as part of the “health-care” “reform”?

  4. When my first son graduated in 2004, he consolidated his loans with Citibank and got a great rate. He has probably paid them off by now. When my second son graduated in 2008, that option was not there, thanks to our wizards of smart in the White House. When we helped him to convert his loans, $<25K, with the Government agency du jour, they offered us length and rate of interest. Following that conversation we began to make payments. After several months, upon reviewing the account’s math online, it became clear that the amount they assigned my son was negatively amortizing the balance!! There was no discussion or disclosure of that fact. Being a money manager, I calculated how much we needed to pay to actually pay DOWN the loan balance. I am sure that most debtors are completely clueless about this fact. I was livid. Actually I was more angry at myself for even trusting the government to do anything above board. So borrower beware. Make sure you check your payments online!!!

  5. I agree the student loan situation is a mess; another gem of an idea engineered by the Political Class.
    However, I don’t buy into the analogy between student loans that are in “non payment” and home mortgages that are under water. The real statistic for comparison would be the percentage of home mortgages that are in “non payment”.

  6. Four years of college tuition, alone, at $35,000 per year are a debt of $140,000 upon graduation at age 22. At 6% per annum for 20 years, interest and principal payments on this obligation are $1,003 per month– $12,036 per year. A single graduate starting at $48,000 nets about $40,800 after tax. This $12,036 is 29.5% of the young adult’s disposable income, leaving $28,764, about $2,400 per month, to live on. Shared rent and utilities take $900, so the kid has $350 per week for food, clothing, ‘phone and entertainment. No car, basic furniture. Not much of a life.
    Obama’s war on the American economy has created the situation where only six in ten college graduates are fortunate enough to land any job at all. Learning a skilled trade at 18, and not having to repay a $140,000 mountain of debt, looks better and better.

  7. Yeahbut…
    Politicians, Democrats just to pick a random example, survive by vote buying; and “subsidizing” is a standard form of that. Throw in a little affirmative action and a dash of debt relief and Voila! – another generation who only need to be able to distinguish between D and R on a ballot. Big Guv will take care of the rest.

  8. I have never been sure whether parent loans are counted in the total or not. And one thing is clear — when a parent takes out a home equity loan or refinances the house, it’s not in the “student loan” figure. For that matter, when the maximums are hit for official “Student Loans,” students will end up with personal loans of other kinds (or at least that was the case for a fellow student of mine 20 years ago), which aren’t counted either. I’ve never seen a figure which attempts to estimate the full amount of debt due to college tuition.

  9. To the present administration this is a feature, not a bug. A whole new dependent political class of loan borrowers whose debt can be manipulated by politicians for votes.

  10. Greetings,
    Hey, I worked 3 jobs, carried 12 hours in spring and fall, 8 hours in each summer semester and graduated with no debt. Using student loans for housing, cars, pizza, laptops is cognitive dissonance or worse and the miscreants that have borrowed this money will probably be “forgiven”/paid off with money from China for tax breaks by given by the elitists in DC. Oh, the shame of it all. It’s mess that will come crashing down when Russia and the Brics get tired of paying for the wall st bonuses and no longer use the dollar to pay for trade.

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