These 3 scary trends show repayment plans aren't fixing the student debt crisis
First, the good news: The rise of income-based student loan repayment plans — along with better practices by loan servicers — has helped relieve student debtors by some measures, according to a Bloomberg analysis of new Department of Education figures.
Since June 2013, the delinquency rate — defined in the analysis as the share of borrowers who are at least a month behind on payments — has fallen from about 25% to 19%. (Note that for individuals, being just one day behind technically makes you delinquent.)
The White House recently painted a fairly rosy picture of student debt in the United States, releasing a July report arguing that this debt is generally beneficial for the economy because it raises incomes and leads to other positive effects like higher voting rates.
But these positive highlights belie other more worrisome signs that young Americans are actually in big trouble when it comes to education debt.
Here are three alarming facts from Bloomberg's analysis of the student loan crisis.
For every $5 of debt, less than $3 is actually getting paid back.
Even though the amount of straightforward delinquencies is down, late repayments are a much bigger problem when you add the less straightforward delinquencies to the mix, such as borrowers who are in bankruptcy, have gotten approved for postponement, have asked for forgiveness because of a disability and those who are in default, which means they are delinquent by at least 270 days (about 9 months).
Defaults are on the rise.
Delinquency isn't a big deal if it's caught quickly and payments are made within a few days; the government's collection measures are unlikely to affect you in such cases.
In addition to credit score damages, when a loan enters default, the entire balance becomes due, leaving the defaulter actually ending up paying extra interest on top of their interest payments — and that doesn't even include collection costs.
Unfortunately, Bloomberg's analysis found that the number of borrowers in default has jumped since last year: Nearly 872,000 borrowers entered default on their direct loans during the first three quarters of 2016, up from about 849,000 during the first three quarters of 2015, amounting to an increase of about 2.6%.
We will have wrinkles by the time we pay off our debt.
Perhaps the most alarming of Bloomberg's findings is the revelation that student debt is taking much longer to pay off than it used to, with student debt becoming more likely to last well into people's 30s and 40s — peak years for starting a family.
As recently as four years ago, a majority of student debt was paid off within 10 years, the analysis found. But that's no longer the case, as 57% of student debt is on a payment schedule that stretches over more than a decade.
To be fair, some of the government's programs to alleviate student debt have not yet fully gone into effect. The Public Service Student Loan Forgiveness program, for instance, will forgive debt for people in lower-paying fields that still require advanced degrees, like public school teachers, after 10 years of repayment.
The first eligible class was in 2007, meaning that no one will enjoy the benefits until 2017.
Another factor to consider: Paying off loans more slowly isn't always bad, especially if it frees up money to begin building a retirement nest egg.