Outstanding U.S. education debt has grown larger than $1.5 trillion, and more than 1 million student loan borrowers are going into default annually.
Unfortunately, experts say the problem will likely get worse, with 40 percent of student loan borrowers potentially going into default by 2023, reported CNBC. Depending on the type of student loan – federal or private – it can take up to nine months of missed payments to be considered in default on your loans. Then, your debt could be sent to a collection agency.
So who is going into default on student loan debt? The Urban Institute, a Washington, D.C-based think tank, analyzed data on borrowers who started repaying in 2012. Almost 25 percent of borrowers defaulted within four years after college.
Additionally, defaulters are more likely to have other types of debt such as credit cards, auto loans, or mortgages versus non-defaulters. More financial hardships can occur such as having medical or utility bills go into collections. Having bigger debts might lead borrowers to postpone paying off their student loans, according to the Urban Institute.
Demographics and Default
The Urban Institute discovered the median income of defaulters is around $50,000 whereas non-defaulters’ median income is around $60,000.
Interestingly, debtors incurring the lowest loan balances are most likely to be unable to pay off their debt. The Urban Institute found that about 1 in 3 people owe under $5,000 for education default within four years as compared to 15 percent of borrowers owing $35,000-plus.
Why is this so? Many students who dropped out of school won’t have as much debt but are challenged because they don’t have a degree, according to CNBC.
Actions to Take Before Defaulting
Being proactive might help prevent student loan default. Debtors who have a hard time repaying their loans should contact their student loan servicer right away, according to experts. Other tips include finding an income-driven payment plan or applying for deferment or forbearance. But be careful with putting your debt on hold, as delaying payments can accrue interest, creating a bigger balance to pay down the road.
Author: Debbie Baratz
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