Student loan stress? Don’t worry about the size of your debt: Focus on this number instead.

ByJames Dennin

You probably have some scary looking student loan balances if you’re an anesthesiologist: Doctors graduate with a lot of debt — about $183,000 on average, according to the Association of American Medical Colleges. But at the same time, you are likely making big bucks, around a quarter of a million dollars each year.

For this reason, those with higher dollar figures of loan debt actually tend to be better off than those with lower balances — one insight from a new Brookings Institution report published Thursday: 37% of people who took out $6,125 are seriously behind on their loans, compared with just 24% of borrowers who borrowed at least $24,000.

The reason is that those with smaller loan balances are more likely to be people who attended a semester or two and then dropped out; or to hold flimsy professional “certificates” from dubious for-profit schools.

“Just because someone has high amounts of debt does not just mean they are in distress,” Judith Scott-Clayton, a Brookings Institution senior fellow, said in a phone interview about her most recent report. “Where are the borrowers in distress? Default is an extreme form of distress ... and it doesn’t correlate very well with the size of the loan borrowed, if anything it’s negatively correlated.”

To truly get a clear-eyed picture of whether your own student loans — or student loans across the country — are reaching “crisis” levels, it’s arguably more important to look at who is struggling. Nationwide, scholars like Scott-Clayton are increasingly arguing that it’s not the amount of student debt we have to worry about — it’s whether people are having a hard time paying it off.

In other words, it’s not about how much you borrow, it’s about the ratio of what you borrowed to what you earn.

Unfortunately that picture may be much worse than we thought, according to Scott-Clayton’s report. Using Department of Education data from October, she estimated that as many as 40% of student loan borrowers will be in default by the year 2023. That’s worse than expected: The best previous forward prediction, she writes, was lower than 30%.

/Brookings Institute

Looking backward, rates in recent years (and using slightly different sample pools) seem closer to 15% or less.

The are a couple of reasons why previous estimates about the default rate were too low, Scott-Clayton explained. For one, the data released in October includes the repayment information for students from the moment they enter college through the entirety of the repayment period, up to 20 years, a much longer period than that observed in previous studies.

The data also includes information on two separate groups of students, those who started in the 1995-1996 academic year, and those who started in the 2003-2004 academic year. Default rates, she found from studying the first set of data, continue to climb outside the typical 10 to 12 year repayment window.

That may have to do with the fact that the longer you take to repay the loans, the more likely you are to be someone experiencing a major financial setback — like being laid off, getting divorced, or feeling the effects of a recession. Accounting for these new defaults is how Scott-Clayton arrived at her new estimate of 40% for the second cohort by the year 2023.

Fixing the problem, she said, will require stricter regulations of for-profit schools, which account for far more than their fair share of defaults than public colleges and universities, private non-profit institutions and even community colleges. That’s unlikely to happen anytime soon, however, since House Republicans introduced a new higher education bill last year that would actually weaken student protections.

What is student loan default?

You need to be at least nine months behind on payments for your student loans to go into default. And when that happens, the consequences can be ruinous. To start, the entire balance of your loan comes due, not just your next minimum payment, meaning that your interest will accumulate much faster.

Your employer may start garnishing your wages, your tax refund can be withheld and you may ultimately end up on the hook for your creditors’ attorney fees. Your credit score will likely take a beating if the default is reported to the credit bureaus.

Even your future social security checks could be at risk.

Black borrowers are far more likely to be affected: “Of 100 students who enter college for the first time, out of 100 black students, 38 will experience a default, that’s three times the rate by white students and almost double the rate of Hispanic students,” Scott-Clayton said. “For black college graduates, their default rate is five times higher than white college graduates, and is even higher than it is for white dropouts.”

There are only two ways to get out of default, according to Kaitlin Pitsker, who covers student loans for the personal finance magazine Kiplinger’s: rehabilitation or a consolidation loan.

“Under a rehabilitation agreement, the borrower agrees to pay a reasonable payment (typically 15% of discretionary income) and must make nine on-time payments,” Pitsker said in an email. “Alternatively, you can consolidate defaulted federal loans through a federal direct consolidation loan, replacing one or more federal loans with one new, fixed-rate loan and agreeing to one of the federal income-driven repayment plans or making three consecutive on-time payments.”

What to do if you fall behind on student loan payments

Generally speaking, as long as your student loans don’t enter default, missing a payment or two isn’t such a big deal if you catch it quickly.

You might be surprised to learn that even people in relatively high-income fields, like doctors, can qualify for certain payment reduction plans through the Department of Education. Income-driven repayment will cap your payments at a certain percentage of what you make. You can also apply for solutions like deferment or forbearance, which will allow you to temporarily stop making payments on your loan while you get your finances in order.

If the prospect of paying off your loans is too overwhelming, Pitsker said, the first step you should take is reach out to your servicer and see if they’re willing to cut you some slack: “If you act quickly, you can set up a new repayment plan that better fits your budget.”

If that doesn’t work, you might also consider getting some outside help. Kiplinger’s notes that the certified financial planners in the XY Planning Network specialize in advising younger clients, have no minimums, and tend to offer low-cost counseling options: for example, pay-by-the-hour and video conferencing.

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