More people than ever are defaulting on student loans -- and it could put the US economy at risk

  • Almost 5 million student loans have gone unpaid for a significant amount of time.
  • Federal and private loans are going into default, making it harder for loan holders to establish credit or buy cars and homes.
  • The federal government is on the hook for the money if defaulters can’t pay.

Approximately 4.6 million Americans have defaulted on federal student loans, according to The Wall Street Journal.

This figure includes an increase of 274,000 people over the last three months. At the end of the third quarter of the fiscal year, these nearly 5 million defaulters represent 22% of all Americans who were required to pay federal student loans.

When a debt hasn’t been paid for 90 days after a scheduled payment, the loan is considered delinquent. If delinquency continues, a loan is at risk of going into default, usually after about 270 days for federal loans. The Wall Street Journal reported defaulted student loans last quarter totaled $US84 billion.

In addition to former students with federal loan payments, many are repaying private student loans or a combination of both. Those in debt from private loans typically have fewer avenues for forgiveness or repayment.

Letting a loan go into default has personal consequences – and economic ones

Personal consequences of defaulting on a loan are numerous and cumbersome. Federal Student Aid – an office of the Department of Education – lists penalties defaulters face including:

  • acceleration of interest payments
  • loss of eligibility for deferments or a repayment plan
  • lack of access to additional federal student aid
  • restricted access on your academic transcript
  • garnished wages
  • inability to buy or sell assets

Defaulting, especially on the scale of $US84 billion, can also have repercussions for the entire economy. The Federal Reserve Bank of New York has researched how student debt has depressed home purchasing by young adults, and found that as much as 35% of the decline in home ownership of people in their late 20s can be attributed to student loans. Defaults make it harder to take out credit or even own a credit card, stifling additional economic activity.

Even with a strong national economy and a low unemployment rate, loan defaults can weigh down the entire country. Permanently defaulted loans are ultimately the burden of taxpayers, and the federal budget will pay out if the loan program continues to lack revenue.

The US Department of Education announced on Monday that it would not be cancelling the debt of thousands of students who were victims of fraud by for-profit colleges. Secretary of Education Betsy DeVos has previously mentioned plans to scale down federal loan forgiveness presented by the Obama administration.

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