Chapter 1 Student Loans and Student Loan Debt
| Jurisdiction | United States |
Chapter 1 Student Loans and Student Loan Debt
A. Student Loan Debt and Delinquency
Sometime during 2012 or early 2013 (estimates vary), education loan debt in the U.S. surpassed $1 trillion. By the end of July 2016, that number had climbed to over $1.36 trillion,8 — the second-highest type of personal debt next to home mortgages, and more than what is owed for credit cards or auto loans. Forty-three million Americans, nearly 27% of adults, have student loan debt.9
For undergraduates in the class of 2016, approximately 70% of undergraduates had taken out loans with average debt of $37,173, according to student loan expert Mark Kantrowitz.10 Students continuing on to graduate school borrow even more and accumulate average debt of $43,500,11 although individual debt exceeding $150,000 is not uncommon.12 Many middle-aged people and senior citizens also have education debt as parents and relatives who have co-signed on student loans.
For several decades, education borrowing grew exponentially. In 1990-91, students took out $11.7 billion in loans to fund their educations.13 Students graduating from public four-year colleges in 1990 averaged debts of $8,200, while the average debt for private college graduates was $10,600.14 By 2010-11, annual borrowing reached a peak of $124 billion.15 Since that time, new student loans per year have declined moderately, to $106 billion in 2014-15,16 including $96 billion from federal sources and approximately $10 billion from private sources.17 Still, in 2015, 70% of graduates from public colleges had loans, with an average debt of $35,051, an increase of $2,000 per student from the previous year.18
Student loan debt is concentrated in the younger demographic. Two-thirds of all student loan debt is held by people under age 40, with about one-third held by people under age 30.19 Another 17% is held by people in their 40s, 12% by people in their 50s, and the remainder by people age 60 and older.20 Education debt owed by older people is increasing. In 2010, 17% of parents co-signed or took out loans for their children's education, up from 5.6% in 1992-93.21 Almost all private lenders now require parents to co-sign education loans, whereas in 2008 only 50% of them did.22 As of 2013, loans to parents for their children's education totaled $100 billion,23 with an additional $10 billion in new parent borrowing in 2014-15.24 In addition, education borrowing by people over the age of 35 is increasing,25 and many older people still owe debt from their own college years. As of 2014, people aged 60 and older owed $58 billion in education loan debt, up from just $6 billion in 2004.26
For many years, the rise in student loan borrowing has been mirrored by the rise in loan delinquency and default.27 Historically, the U.S. Department of Education tracked student loan default in units of two-year cohorts — i.e., the default rate of borrowers who have been in repayment for two years.28 For borrowers who entered repayment in 2009, 8.8% (320,000 borrowers) had defaulted by the end of 2010.29 This was an increase from a 7% default rate for borrowers who entered repayment in 2008.30 But the two-year analysis minimized the actual default rate. Starting in 2012, the Department of Education switched to reporting rates for three-year repayment periods. In August 2013, the Consumer Financial Protection Bureau released a report that found that only about 42% of borrowers with Direct loans and 60% of borrowers with Federal Family Education Loans were paying their loans according to the original terms.31 For borrowers who were no longer in school or within the grace period, 21% of Direct loan borrowers and 17% of FFEL borrowers were in forbearance or deferment, with 5% of Direct loan borrowers and 14% of FFEL borrowers officially in default.
There are signs that the student loan default rate may be leveling off or even declining. In September 2016, the Department of Education announced that the three-year federal student loan cohort default rate dropped from 11.8% to 11.3% for borrowers who entered repayment between fiscal years 2012 and 2013. This represents 593,000 former college students out of 5.2 million total borrowers, and 2016 was the third straight year that the default rate has moved downward since 2010, when the cohort default rate was 14.7%.32
While the declining default numbers seem promising, the cohort default rate does not present a complete picture of the difficulty that many students experience in repaying their loans. This is because the cohort default metric does not take into account borrowers in the six-month post-graduate grace period, those entering graduate school or who have hardship deferments, or who are in loan-forgiveness programs. Indeed, according to a 2015 White House report, the real nonpayment rate is about 12.5 percentage points greater than the cohort default rate for students from four-year schools, 25 points greater for students from junior colleges, and 30 points greater for students from for-profit schools.33 These higher numbers may mask higher defaults to come. In a study of 2005, 2007 and 2009 cohorts, researchers at the New York Federal Reserve Bank found that approximately 25% of borrowers in each cohort had defaulted as of the first quarter 2014.34 In other words, the 2005 cohort reached the 25% default rate in nine years, the 2007 cohort seven years, and the 2009 cohort reached that mark in only five years. This means that the default rate is worsening over time. Overall, about 40% of all borrowers are not making payments or are behind on payments, putting approximately $200 billion at risk of default at taxpayer expense.35
Students who attend for-profit colleges have a much worse repayment record. While for-profit schools enroll 26% of all borrowers, they account for 35% of all defaults.36 On July 30, 2012, the Senate Committee on Health, Education, Labor, and Pensions released a report on loans incurred at for-profit proprietary schools.37 According to the report, 96% of students at proprietary schools take out education loans,38 but more than 54% of students who commence full-time studies at for-profit schools do not complete their programs,39 a far higher percentage than the 35% of students at nonprofit schools who fail to do so. In addition, leaving a program significantly increases the probability that students will default on their student loans.40 The Department of Education has estimated that 46.3 cents of each dollar lent to for-profit students who entered repayment in 2008 will default.41 One for-profit school estimates that its own student de-fault rates may be as high as 77 cents per dollar.42 The comparable number for nonprofit schools is 31.1 cents per dollar in loans.43
The correlation among for-profit schools, student loans and high rates of default caught the attention of the Consumer Financial Protection Bureau (CFPB), a government agency created after the 2008 financial crisis whose mission is "to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace."44 In 2014, the CFPB sued two for-profit schools, ITT Educational Services Inc. (ITT) and Corinthian Colleges Inc. (Corinthian), for using illegal tactics to induce students into taking out private student loans. The complaints alleged that the schools coerced students into taking out private loans by engaging in a variety of unfair acts and practices designed to interfere with the students' ability to make informed choices, such as falsifying job placement rates in marketing materials, using misleading promotions of career opportunities and falsifying verified employment placements.45 The CFPB also alleged that Corinthian engaged in unfair debt-collection practices by withholding student diplomas and interfering with student registration and attendance at classes. Following the lawsuits by the CFPB and actions brought by the Department of Education, in 2015 Corinthian sold most of its schools, closed its doors and filed for bankruptcy protection.46 In late 2016, ITT abruptly closed its schools and also filed for bankruptcy.47
Many former Corinthian and ITT students, who funded their education through federal and private loans, are left without education degrees and are facing uncertain job opportunities. The Corinthian and ITT closings have highlighted three forms of relief that may be available to students of closed schools: (1) a student may be eligible for a closed-school discharge; (2) the student may transfer the closed school's credits to another school in a similar program; or (3) the student may be eligible for a borrower defense to repayment discharge if the school committed fraud or violated applicable state law.
A closed-school discharge results in a 100% discharge of certain federal loans that the student took out to attend the closed school and a reimbursement of amounts already paid to the government.48 To qualify for a closed school discharge, a student must meet the following criteria: (1) the student did not finish his program at the school; (2) the student did not already transfer the closed school's credits to another school in a similar program; and (3) the student was attending the school when it closed or the student withdrew within 120 days of the school's closing date.49 To request a closed-school discharge, a student must submit an application to his federal loan servicer.50
Regardless of whether their school closed, students who believe they were defrauded or that their school violated applicable state law may be eligible for loan forgiveness based on a borrower-defense-to-repayment discharge, which will also result in a discharge of certain federal loans and a reimbursement of amounts paid to the government.51 To request a borrower-defense-to-repayment discharge, a student must submit a claim and additional materials to the Department of Education.52 While the application is being...
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