David Dulberg
October 2018

Who Is Defaulting on Student Loan Debt and How Do We Best Help?

Who are the student loan borrowers most likely to default? What are the indicators? How can we better target assistance with student loan repayment? Should these policies focus on the highest-need borrowers?

These are some of the questions that Americans must ask themselves about student loan debt. With more than 44 million borrowers owing more than $1.5 trillion, this national crisis brims over with the countless struggles of millions of overwhelmed individuals.

Of course, to come up with answers that are helpful, we must have useful data. A recent report by the Urban Institute, Underwater on Student Debt, painted a clear portrait of who is having trouble with student loan debt and what their circumstances are. The report looked at a random two percent sample of U.S. consumers from the three national credit bureaus. Beginning in 2012, Urban Institute followed these borrowers through repayment and default.

Who Is Defaulting?

  • Default rates climb each year in the life of the loan. One percent of borrowers default in the first year increasing to 22 percent in the fourth year.
  • Lower balances are more default-prone. The default rate for balances of less than $5,000 is 32 percent, while it is only 15 percent for balances in excess of $35,000.
  • Defaulting borrowers are less likely to have household debt that requires credit assessments, such as credit card, mortgage, or auto debt.
  • Defaulting borrowers are more likely to have medical and utility debt.

Crunching these numbers shows the crushing nature of student loan debt on certain groups of borrowers. The highest default rates are for those carrying the least amount of debt, who are also those who have the worst credit scores. They are often already having difficulty keeping up with utilities and medical bills. They are even those who worked hardest  outside the classroom while in school. The extra pressure from student loan debt, year after year, becomes increasingly unbearable for these borrowers.

Who, exactly, are these people with lower credit scores, already under financial pressure prior to repaying their student loan debt? The study looked at loans in default by zip code and found that they emanated from neighborhoods with less educated populations and higher concentrations of black and Hispanic residents. These groups are most at risk for poor financial, health, and educational outcomes.

Indicators of Default

  • The borrower’s credit score in the year before entering repayment.
  • The type of debt held by the borrower prior to repayment—household debt versus medical/utility debt.
  • Whether the borrower is in collections for debt in the year prior to repayment.

If it remains in the national interest to broaden higher education to populations less likely to go to college, these factors must be considered. Based on these indicators, the report concludes that it is up to policymakers to assess who is most at risk and provide a solid, fair safety net “when life gets in the way of repayment.” This is a good start. Knowledge is power. And we know that those who are most at risk of defaulting already have fragile social and financial standing. Can we encourage better financial literacy for these borrowers? Can we better support their success?

These are just a few of the questions we can ask. Perhaps you have thoughts or questions of your own. At Ameritech Financial, we would love to hear about your experience navigating your own student loan debt, and how any of these factors have, or have not, played into it. Let us know what you are thinking below in the comments section!

Options are available to help

Most people do not realize that there are programs designed to help those who may be struggling with their student loan payments. Thousands of borrowers have trusted Ameritech Financial to be their advocate. Click here to find out what options are available. Our services could help you get back on track.

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David Dulberg

David Dulberg lives with his wife in the coastal hills above a narrow creek, mid-canopy in a redwood forest. He has been writing for non-profits for many years, and volunteers as a pilot on the Baum Squad, a tandem bike riding program for the Earle Baum Center for the Blind. He does not have a pet. This does not make him a bad person.

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