Real Student Loan Delinquency Rates at 26%

February 2, 2018
By: Mason Gallik

As of the end of 2017, there is over $1.36 trillion in outstanding federal student loans. That is $1,360,000,000,000 or more than 13 billion one hundred-dollar bills. In the United States, it is the second largest area of consumer debt behind mortgage loans. Federal student loans increased 5.8% from last year’s $1.29 trillion total. Official student default rates are listed at 11.5% for students entering repayment in the past three years, but a deeper look at the composition of outstanding federal student loans paints a much bleaker picture.

In this article, we will be using the Direct Loan Portfolio, which contains over $1.05 trillion of the outstanding federal student loans or about three quarters of the total. This provides data going back to 2013 to make comparisons for a very large portion of outstanding student loans. Of this $1.05 trillion, $83.9 billion is in default. This may not seem bad at first glance since it is about 8%, but not all of the $1.05 trillion is in repayment. To get a more accurate picture, we need to compare defaults to loans in repayment. In the Direct Loan Portfolio, there is $547.5 billion in repayment, so if you add the $83.9 billion in default you get about $631 billion that should be in repayment. This looks worse because 83.9 divided by 631 gives a default rate of 13.3% of the portfolio.

As a comparison, in 2010, the seriously delinquent rate peaked at almost 9% for mortgages just after the Great Recession. It gets worse though. To be classified as in default on your student loans you need to be 361 days delinquent. To be seriously delinquent on your mortgage, you need to be over 90 days delinquent. That is a big difference. Fortunately, there is data from the Direct Loan Portfolio that breaks down how much of the portfolio is behind on payments before being classified as default and transferring to a different system. There is an additional $45.5 billion that is between 90 and 360 days delinquent. If we use the same seriously delinquent criteria for student loans, the comparable seriously delinquent number jumps to 20.3% or more than double the Great Recession’s 9% for mortgages.

According to the Federal Reserve, the delinquency rate of mortgages (greater than 30 days behind) peaked at 11.5% in 2010. If we add in the $35 billion that is 31-90 days behind, the student loan delinquency rate jumps to just under 26%. This means that almost 26% of the Direct Loan Portfolio that should be in repayment or $163.4 billion is behind on payments!

The current delinquency rate of almost 26% has stayed relatively stable within a few percentage points since mid 2013’s 27.8%. This is despite the introduction of Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). Borrowers were able to start signing up for PAYE in mid 2013 and REPAYE in late 2015. The programs were designed to provide relief to borrowers who were struggling with payments by capping monthly payment at a certain percentage of income. PAYE and REPAYE have become very popular. In mid 2013 when PAYE started, 56% of the Direct Loan Portfolio that was in repayment, deferment, or forbearance had a level payment plan (same payment every month for the life of the loan). Only 20% were in income-driven plans (mainly Income Based Repayment (IBR) and Income Contingent Repayment (ICR)). At the end of 2017, these numbers are vastly different. Only about 35% of the portfolio is in level repayment plans, while over 45% is spread across the income-driven plans including IBR, ICR, PAYE, and REPAYE. This is because there was a large shift into the PAYE and REPAYE programs.

So what does this all mean? Despite pushing student loan borrowers into income-driven plans that are supposed to make payments affordable, delinquency rates have remained relatively stable as the amount of student loans exploded. Student loan delinquencies are very high and many struggle to repay loans despite the expansion of income-driven forgiveness programs. The only way to combat unaffordable student debt is to estimate how much you are going to owe beforehand, so you can make a sound decision on whether a college and career path will be worth the time and money. LoanMajor’s calculators do this by estimating your loans before you attend college.