22% of Federal Student Loans Are In Default or Delayed Default

22% of Federal Student Loans Are In Default or Delayed Default
August 12, 2013

Only 40 percent of individuals with direct federal student loans are currently repaying their debt. Many of the rest are taking advantage of a grace period before repayment, but 14 percent are in forbearance (delayed default), and 8 percent are in default, according to a report by the Consumer Financial Protection Bureau.

“[T]here are over 7 million borrowers in default on a federal or private student loan. We also estimate that roughly a third of Federal Direct Loan Program borrowers have chosen alternative repayment plans to lower their payments,” wrote report author Rohit Chapra, the CFPB’s student loan ombudsman.

These numbers do not bode well for American taxpayers, as student debt totals approximately $1 trillion.  

Free-market advocates for years have been warning against the potential dangers of government-granted and subsidized student loans as a distortion of the education market and a financial burden on the taxpayers.

Education Lending Bubble

The federal government’s student loan policy does not offer competitive interest rates based on risk of default. Just as manipulations in the home lending market caused a proliferation of subprime mortgage loans to borrowers who would never be able to repay their debts, student loans are being offered to individuals who have slim hope of earning enough money to repay those loans even if they complete their college educations.

“These young people are being suckered into taking out loans that will stick to them forever. Only Congress could think up such a scheme and call it a benefit to the youth,” said George Clowes, a Heartland Institute senior fellow in education and formerly managing editor of School Reform News.

Government-backed student loans are luring academically weaker and less committed students to enroll in college, leading to increased dropout rates, said Neal McCluskey, associate director of the Cato Institute’s Center for Education Freedom. He noted “roughly one out of every two college students don’t graduate today.” Even at higher-end private schools, the graduation rate is only about 66 percent. Graduation rates for part-time students are well below these averages. 

Competing Tuition Solutions

With easy credit sparking heightened demand for higher education, colleges have responded by raising their tuitions. The higher tuitions have in turn raised the demand for more easy credit for student loans.

McCluskey said free-market advocates support an end to student loans to save the taxpayers money and stem the artificial demand for college educations that has driven up prices.

However, the Obama administration has been hinting at the opposite of a free-market solution: tuition price controls. Administration officials have suggested the federal government could cut off student loans to attend specific institutions that continue to raise tuition prices.

The sky-high college tuitions are not bettering higher education, said Herbert Walberg, a senior fellow in education at The Heartland Institute, distinguished visiting fellow at the Hoover Institution, and professor emeritus at the University of Illinois-Chicago. Much of the money is being directed to administration and other ancillary activities.

Too Little Teaching

“There is too much focus on community service and research, which doesn’t help students,” Walberg said. “We need to return to the old days when colleges concentrated on teaching.”

With 8 percent of students in default on their student loans and 14 percent in forbearance, taxpayers must cover billions of dollars of losses. Those losses are only expected to increase as tuition costs rise and more students find themselves unable to pay back their loans.

To reverse course on student lending will require a substantial change in the way people view higher education, said Frederick Hess, resident scholar and director of education policy at the American Enterprise Institute.

He said the key is to “stop romanticizing college loans. We need to worry about students, but policy must be appropriate.”

Matt Faherty (matt.heartland@gmail.com) writes from Chicago.

 

Internet Info

 

“A closer look at the trillion,” Rohit Chopra: http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/