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December 05, 2012 9:30 PM The Borrower Problem

By Daniel Luzer

The average college student now holds more than $26,000 worth of education debt upon graduation. This figure, while sobering (it’s roughly the price of a new Honda Civic) is familiar. What ought to be more troubling, however, is how students are managing (or not) that debt. When should we start getting worried?

According to an article at U.S. News & World Report

The most recent two-year rate (consisting of borrowers whose first loan repayments came due between Oct. 1, 2009 and Sept. 30, 2010 and who defaulted before Sept. 30, 2011) was 9.1 percent. This was up from the previous rate of 8.8 percent.

A student loan goes into default when the borrower fails to make payments within 360 days after the loan’s comes due. Another, longer-term look at the problem reveals something perhaps more troubling.

The national three-year [default] rate [referring to people who’ve been out of college for three years]…. was 13.4 percent. [Some] 20 percent of the federal loans that entered repayment in 1995 have gone into default.

In addition, last year some 16 percent borrowers used deferment and forbearance to postpone payments and avoid delinquency. About 26 percent were late making payments but hadn’t defaulted.

PowerDynamic

These statistics alone don’t indicate a structural problem in America’s current college funding scheme (repayment on student loan rates are a function of graduates’ income; that is a function of the economy) but they sure don’t indicate a good trend.

What will be interesting (frightening?) is to see it what happens to student loan repayment rates over time. It’s true that college graduates have many options available with regard to forbearance and deferment, designed to help them avoid financial difficulty in times when the economy (or their own careers) are bad. But ultimately, from an accounting perspective, if someone has taken out X in total student loans, he must eventually repay X + interest over the course of his career. The more people there are in America not doing that, the more the system is in trouble. [Image via]

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer