Default Rates on Student Debt Rise Sharply

It may be shocking that many people who took out student loans cannot pay them, until the full circumstances of the situation are explained. And these circumstances demonstrate why the system to make the loans was based on crazy assumptions in the first place.

The Education Department and the Consumer Financial Protection Bureau have put out a report that covers the private college loan system and how it has created a large number of loans that can never be paid back.

Among the points the report makes are:

American consumers owe more than $150 billion in outstanding private student loan debt.

And:

Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans.

Finally:

In 2009, the unemployment rate for private student loan borrowers who started school in the 2003 – 2004 academic year was 16%. Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income.

As the unemployment rate has probably improved slightly since 2009, the ability to pay could have improved marginally.

Student loans are based on the premise that students find jobs that pay them relatively well, and that the people who got the loans feel obliged to pay them. Students are not screened about their future plans. If they plan to become surgeons, they may pay off their loans — eventually. If they plan to join the Peace Corps, they probably will not.

People who can default on loans often do, even though the ethics of the decision are troubling. The government has not been very effective, at least as far as data is available, in the collection of student loans. There is no reason to think that loans made by private financial firms have fared any better. Attaching wages might work — if there are wages to attach. The process to do so likely requires time in court. The expense to force people to pay may be greater than the reward.

A system that predicates loans on the future behavior of people who have just started their educations, and may not begin their working lives for years, is bound to create an unusually high level of default.

Douglas A. McIntyre