College graduates hit with crippling student loans

College graduates often face insurmountable student debt. What do recent graduates actually face when they enter the “real world”?

For borrowers affected by Hurricane Harvey or Hurricane Irma, contact your servicer for more information on the status of your loan. Borrowers who live or work in disaster-affected areas typically receive a 3-month forbearance on their loans.

How are graduates coping with student debt?

With Education Department Secretary Betsy DeVos rolling back regulations on for-profit colleges, many borrowers and students are concerned about excessive student loans. Young graduates often struggle to find their footing post-graduation. Tuition costs are on the rise in nearly every state. Although starting salaries for college graduates are at an all-time high, the unemployment rate for young college graduates is 5.6% and the underemployment rate is 12.6%, both of which have increased since 2007. Many recent graduates live at home as well. 19% of 18-34-year-old college graduates lived with their parents in 2014. Rent prices increased steadily in almost every major city in the last year. The purchase of single-family homes has declined in recent months, although home sales generally increase in the spring and summer months. When millennials do buy houses, they tend to purchase homes in the suburbs instead of in cities, leading to a rise in commuting and remote employment.

In addition to each of these factors, many recent graduates struggle to repay their student debt.  Student debt numbers have increased steadily over the past decade, from an average of $2,042 owed per capita in 2006 to $4,920 in 2016, increasing by 241%.

Borrowers who fail to make payments on their loans for 270 days enter into default. Defaulting on a loan is a drastic measure with devastating consequences. Use the chart below to find the 3-year cohort default rate for your school for borrowers who entered into repayment in 2013. States with schools with the highest percentage of default rates include New Mexico (18.98% average default rate), West Virginia (16.29% average default rate), and Kentucky (15.55% average default rate). States with schools with the lowest number of default rates include Massachusetts (6.12% average default rate), North Dakota (6.53% average default rate), and Vermont (7.23%).

Graduates from for-profit colleges face the greatest challenge when paying back their student loans. On average, graduates of for-profit colleges and universities owe $39,950 after graduation in 2012 — 88% of students borrowed to get through school — compared to $25,550, the average amount owed for students who attended public universities and $32,300, the amount owed by graduates of private nonprofit universities, with 66% and 75% of students borrowing, respectively. Graduates of for-profit colleges not only owe more money post-graduation, but also default on their loans at a higher rate than graduates of other colleges and universities. For 2015 graduates, for-profit borrowers defaulted at a rate of 7.7% by their second year of payments while graduates of nonprofit schools defaulted at a rate of 3.3% in the same time period.

See default rates in the map below:

What happens when you default on a loan?

College graduates have different options when it comes to loan repayment. Typically, lenders offer a grace period of 6 months after college before graduates are required to start payments on their loans. During this period, for subsidized Stafford loans, interest does not accrue, although interest does accrue on unsubsidized loans. After a grace period has ended, graduates are expected to begin payments on their student loans. Lenders put together a payment plan and set a level of minimum payments for graduates.

College graduates and other borrowers may qualify for deferment or forbearance if they are facing financial difficulties like prohibitive medical payments, starting a new job, or other reasons. Deferments are handled directly through a lender. If a graduate wants to defer a loan payment, they must apply themselves. Borrowers may also participate in various programs that would qualify them for loan forgiveness, like teaching programs. During deferment, a debtor isn’t responsible for paying interest on subsidized loans. During forbearance and deferment on unsubsidized loans, interest payments are usually still required. If a graduate is required to pay interest during deferment or forbearance, they can pay it during the non-paying period or allow the interest to accrue unpaid on the loans. See more information on loan deferment and forbearance here.

After the grace period and possible deferments, graduates are required to make monthly payments on loans to avoid accruing interest as well as defaulting on the loan. The average monthly payment on student loans for college graduates aged 20-30 is $351. For 30-40-year-olds, the average monthly payment is $203.

Some borrowers may be able to apply for loan forgiveness. With the federal loan forgiveness program, debtors may qualify for loan forgiveness after 10 years of payments made (120 payments), while in the program. Payments may be income-based. Debtors must be in the program for their payments to qualify for the loan forgiveness program, but applying for the program may be difficult for some. See how to apply for loan forgiveness here.

When borrowers fail to pay student loans, they are first considered delinquent. When a borrower fails to make a payment, a delinquency period begins a day after the missed payment. Lenders are obligated to send notice, asking for collection on the loan and alerting a debtor to their status of delinquency. 90 days after a delinquency period begins, the delinquency will be reported to credit bureaus, damaging the delinquent borrower’s credit score.

Defaulting on a loan means a debtor has failed to make payments on a loan for more than 9 months, or 270 days. When default occurs, the consequences vary. The entire balance of the loan may be due immediately. Employers may be required to allocate a portion of the debtor’s paycheck to the loan, and the debtor’s credit is damaged. The government may even sue loan recipients who have defaulted. Debtors who have defaulted on student loans are frequently struggling to make ends meet, with the consequences of defaulting only serving to compound their financial issues. Wage garnishing may cause defaulted borrowers to face financial crises, while a damaged credit score makes it even more difficult to obtain a loan for a house or even rent an apartment.

Why are default rates so high?

On average, the rate of borrowers defaulting on student loans has increased in recent decades. Default rates increased sharply for graduates from 2007-2010, who entered the workforce during a stagnant economy when they graduated. According to Navient’s default rates, for graduates of nonprofit universities, 2007 graduates defaulted at a rate of 4.3% at 3 years after graduation, compared to 1.8% of 2004 graduates and 0.0% of 1998 graduates in the same time period. According to Navient, the majority of defaulters are borrowers who have not completed college. In the past 5 years, overall default rates have decreased.

Navient, which is the largest student loan servicer in the country, has recently faced a lawsuit claiming that the company misled borrowers by suggesting difficult repayment plans as well as encouraging plans that allowed interest to accrue over periods of non-payment. The company also failed to inform borrowers in a clear and timely manner when the terms of their repayment plans were changing, according to the lawsuit. Navient may earn more money when interest rates increase during forbearance or deferment periods. Similarly, when a debtor defaults on a loan, interest rates may increase. Navient owns collection companies, like Pioneer Credit Recovery, sent by the government to collect on defaulted student loans.

While borrowers may be concerned about their ability to pay back their students loans while avoiding default, they do have options. Programs like income-based repayments, loan forgiveness and the option to defer loan payments allow struggling graduates ways to get out from under the staggering debt levels they may be facing. However, Education Department Secretary Betsy DeVos recently ended the agreement between the Education Department and the Consumer Financial Protection Bureau, a government agency intended to protect borrowers. The CFPB works to hold loan servicers accountable when they fail consumers, and had recently filed suit against Navient for “failing borrowers.”

Overall, Americans owe $1.44 trillion in student loans. With 44.2 million people in debt for their college education, student debt is a crisis in the US.

Student Debt By The Numbers:

Sources: Sallie Mae, Student Loan Hero, Federal Student Aid Office, Market Watch

See also:

The average cost of college tuition in each state

How does affirmative action change college enrollment?

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