One in Five Federal Student Loans Go Into Default
To put that number in perspective, the default rate on first mortgages hit a record high of 5.67% in 2009 and has since pulled back to 3.71%. The default rate on credit cards is 9.14%, and the default rate on car loans peaked at 2.75% last year.
And while defaults on those loans generally require just three months of missed payments, a federal student loan must go close to one year without payments before it is considered to be in default.
Borrowers are often unaware of the risks associated with student loans. For too long, guidance counselors, financial aid officers, and admissions officers have been telling young people that student loans are a good form of debt, and that the high earnings that come with a college degree will make that debt manageable. We can now say definitively that that was never true for a higher percentage of borrowers than on almost any other kind of loan.
Fallout is Severe
The consequences of default on a student loan are also significantly more severe than many borrowers realize. Students who default on their loans can have their wages and tax refunds garnished, can be denied security clearances (effectively ruling out many careers in government), and can be denied the ability to renew professional licenses. Student loans are not dischargable in bankruptcy and, if you still haven't paid up by the time you start collecting Social Security, that too can be garnished.
And while credit card defaults can often be settled for a few cents on the dollar, federal student loans can never be settled for less than the total amount borrowed, plus penalties and fees.
Some good news: now that this new data is public, it may encourage families to look at alternatives to student loans -- like working-study programs and attending a less expensive school (which is, incidentally, how I've paid for college with cash without parental help or loans).
Finally, nothing motivates like fear. Who among us wants to look their kid in the eye while he's signing the promissory note and say: "There is a 1 in 5 chance this will ruin your life?"