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Policymakers and researchers who wish to reform the student loan system are often bedeviled by a lack of good data on how student loans actually perform. A new data release, tracking the loan outcomes of student borrowers who started school in the mid-2000s, thus provides some much-needed insight into the long-term performance of student loans. Perhaps unsurprisingly, it’s a mixed bag.
Among students who started college in 2003 and borrowed federal student loans, about 38% have made no progress paying down their principal balances, as of mid-2015. In other words, borrowers in this group owe more now than they originally borrowed, due to accrued interest.
On the flipside, 26% of borrowers who started college in 2003 have fully paid off their loans. This is consistent with other evidence showing that many borrowers pay down their loans faster than they need to. Another 36% are making progress on their principal balances, but have not yet fully paid off their obligations.
Borrowers who either did not earn a degree, or earned only an associate’s degree, are making the slowest progress paying down their loans. Students who earned an occupational certificate are making decent progress, with 35% of this group fully paid off. Students who earned a bachelor’s degree are also doing well—though 28% of this group has failed to make any progress paying down principal.
One of the strongest predictors of repayment progress is the amount students originally borrowed. Almost two-thirds of students who borrowed less than $5,000 have fully paid off their loans, though a fifth of this group has still not made any progress paying down principal. Meanwhile, students who borrowed more than $50,000, a group comprising mostly individuals who went to graduate school, have made the least progress on their loans. Of this group, seven in ten have not paid down a single dollar of principal.
A lack of progress in paying down one’s loans is not by itself an indicator of distress. Naturally, we would expect those with large balances to make slower progress, for the simple reason that there is more to pay down. However, it is troubling that a substantial minority of borrowers have not paid down a single dollar of principal—especially considering that these borrowers started school over a decade ago.
Several possible explanations exist for many student borrowers’ total lack of progress in paying down their principal. The simplest explanation is default: borrowers simply don’t pay their loans, and so their balances rise due to interest. However, borrowers in default account for only 20% of individuals who fail to pay down principal. Other forces must be at work.
Staying in school is one possibility: while in school, students can request a “deferment,” under which they avoid mandatory loan payments but still accrue interest on most types of loans. Indeed, 49% of borrowers who pursued graduate school have made no progress on their loans, compared to 36% of undergraduate-only borrowers.
Besides staying in school, the federal government offers borrowers many other ways to avoid paying down their loans. Students can also request a deferment on their loans for up to three years while they are unemployed or experiencing some other form of hardship. A loan forbearance is another possibility: loan servicers can grant borrowers a forbearance for a number of reasons. Often, there is no time limit on how long a student can be in forbearance. Some forms of deferment and forbearance have nothing to do with hardship, such as deferments for graduate school or military service.
Interest accrues on federal student loans during forbearance, and on most types of loans during deferment. Thus, an individual who uses these tools may end up owing far more than he borrowed. While these tools allow borrowers to avoid payments temporarily, accrued interest means total lifetime loan payments may be much higher than they would if the borrower had entered repayment immediately.
Around a quarter of individuals who currently owe more than they borrowed are currently in deferment or forbearance, and 87% of these borrowers have had at least one deferment or forbearance in the past. While not the only reason for failure to make progress on loans, these options clearly play a major role.
In sum, the federal government offers several ways for borrowers to avoid paying their loans, sometimes indefinitely. Taken together, they have enabled borrowers to avoid paying down principal for extended periods of time. Failing to pay down principal is not automatically equivalent with borrower distress. But it should be concerning that, twelve years after starting school, nearly four in ten borrowers have not made any progress paying down their loans.
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