The Wall Street Journal’s Josh Mitchell recently authored an article in which he calls attention to the roughly 16% student loan debt default rate, as measured in terms of number of borrowers.
That data point, by itself, is extraordinarily high. In proper context, it’s calamitous.
At $125 billion in aggregate value, these defaulted loans represent roughly 10% of all student loans that are currently outstanding — and roughly 13% of those that are government-guaranteed. Yet only about half these debts are actually in repayment (because the other half represents deferred borrowings for students who are still in school). As such, that 10% (or 13%) is really closer to 20% (or 26%).
That’s nearly double the default rate for single-family mortgages at its height, in the aftermath of the 2008 economic collapse. Here too, though, that metric is also misleading.
For all other forms of consumer debt — commercial debts as well, for that matter — defaults are measured on contracts where the payments are 91 or more days past due. Only within the unique alternative universe of government-backed student loans are defaults measured at 270 or more days.
Therefore, if the Federal Reserve Bank of New York is correct at noting in its most recent Quarterly Report on Household Debt and Credit that seriously delinquent student loans (more than 90 days past due) represent 11% of all outstanding education debts, and if that metric excludes loans that have already been declared to be in default, the most accurate default rate lies somewhere between 40% and 50%.
Hence my use of the word calamitous.
Would Free College Tuition Solve the Problem?
With all due respect to both Secretary Hillary Clinton and Sen. Bernie Sanders, the notion of free tuition for higher education does nothing for those who are already encumbered.
All these debts — without regard for origination channel (public vs. private) and payment status (current vs. past-due) — should be restructured so that:
- Installment payments are made over 20 years instead of 10
- The interest rate represents the true breakeven point for the government
- Borrowers have the option to accelerate repayment without penalty
Even if lawmakers decide to reduce the 20-year restructure term by subtracting twice the number of months that have been paid to date, the net effect on all borrowers will be significant.
It’s the difference between debts that are more likely to be repaid than not, major consumer purchases that are more likely to be undertaken than not, and a taxpayer-funded bailout that would otherwise be more likely than not.
As for all the free tuition rhetoric? According to a recent Princeton Survey Research Associates report, 62% of those surveyed love the idea, although nearly half are unwilling to cough up the money (in the form of higher taxes) to pay for it.
Therefore, the only way to make this ideal a reality is to attack the cost side of the equation.
We can start by encouraging institutional consolidations to eliminate operational redundancies, eliminating tax breaks for endowment funds and requiring that the income these investment funds generate are used to offset the price of tuition.
At that point, not only will we have addressed the problem that exists today, but we will have also taken steps to help ensure against its recurrence.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
Image: Lorraine Boogich