Borrowers on the hook for more than half of student loans are delaying principal and interest payments, contributing to rising balances for recent graduates who face a weak jobs market, according to a new study.
“With unemployment rates remaining high, the repayment of these loans remains a concern,” said Ezra Becker, vice president of research and consulting for Chicago-based TransUnion, which conducted the study. “Students can defer their loans for only a certain period, often up to three years, and after that these students can find themselves in a difficult position financially.”
Filing for bankruptcy after that rarely solves the problem, as student loans generally aren’t dischargeable in court. So graduates have to either begin paying or ask for forbearance, another grace period that that buys them more time but for which some lenders also charge a monthly fee.
TransUnion, one of three major credit-reporting agencies, examined every active student loan in its credit database from March 2007 to March 2012, determining whether they were being repaid or were in deferred status — meaning repayment of principal and interest was temporarily delayed. It determined that 65.5 million of 128.8 million student loans outstanding as of last March were deferred. TransUnion said “virtually every student lender,” including the U.S. government, reports its data to the company.
The average debt per borrower rose, by 30 percent since 2007, to $23,829, TransUnion said.
And the graduates and the lenders aren’t the only ones affected. Rising student debt levels can act as a drag on the economy.
“Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family,” U.S. Sen. Dick Durbin, D-Ill., said in January after reintroducing two pieces of legislation related to student loans. “And it’s not only young people facing this crisis but also parents, siblings and even grandparents who co-signed private loans long ago.”
The U.S. Consumer Financial Protection Bureau said in an October report that “many recent graduates are seeking to pay less in interest on private and federal student loans so they can one day purchase a home or otherwise economically progress.”
“There are also signs that young workers are not able to save enough in tax-deferred retirement plans,” Rohit Chopra, the bureau’s student-loan ombudsman, said at a congressional forum on student loans in August in Chicago.
Consider Sheila Uribe, 28. The Chicago resident has about $60,000 in student debt after earning a business degree from Elmhurst College in Elmhurst, Ill. And because she works full time, she can no longer defer her loan payments.
The married mother of two, who works as an administrative assistant at a suburban machinery company, received federal aid for her studies in 2003 but, needing more money, she began taking out private loans in 2005. She ultimately took out three private loans, with her mother co-signing one of them.
She graduated with $35,000 in student loan debt.
“When you’re young, the future seems a long way off, and loan repayments sound pretty manageable,” said Uribe, who said she has worked since she was 15 years old.
She and her husband then had their first child after a difficult pregnancy.
She was no longer a student, so her loans were no longer in deferment, and she said all of her loans came due at once. Due to variable interest rates, the combined balances are now about $60,000. The difficult economy meant that she and her husband were working fewer hours. She and her mother have gotten up to six calls a day from collectors seeking repayment.
She said that until she pays down her loans, other spending will remain difficult.
“My husband and I try to live within our means by sharing a car, working full time and not spending money on frivolous things,” she said. “But my credit is shot, and any hope I ever had of owning a home, making a major purchase with credit, or going back to school is all gone.”
Last week, she said she received some good news. A lender on a $19,000 loan has agreed to reduce her interest rate from about 10 percent to 0.02 percent.
She and her mother reached out to Durbin and in August spoke at a news conference held by the senator, who in January reintroduced legislation dealing with student loans.
The Fairness for Struggling Students Act of 2013 would treat privately issued loans in bankruptcy the same as other types of private debt. The Know Before You Owe Act of 2013 would require schools to counsel students before they take on private student loan debt.
Uribe’s mother, Marilyn DeVries, said that she too has had setbacks during the recession, getting laid off and then landing a job that paid a third of what she had made. She said she and her husband, who had health problems, had to empty their 401(k) to keep up their mortgage payments. Last year, they sold some property at a loss to pay taxes.
“I know my husband and I will be working well into our retirement years,” she said. “Don’t co-sign and don’t let your kids take out these loans.”
The balance of loans that are in deferred status represented $388 billion of $893 billion in student debt outstanding, TransUnion said. That’s up from $228 billion in 2007.
The U.S. Consumer Financial Protection Bureau estimated last October that student debt now surpasses $1 trillion, but, in November, the Federal Reserve Bank of New York, long a source on student loan data, said outstanding student loan balances were $956 billion as of Sept. 30.
TransUnion’s finding that about half of student loan payments are being deferred is consistent with findings from the New York Fed.
Elevent percent of student loan balances are 90 or more days delinquent, the New York Fed estimates. That’s higher than most other credit products, including mortgages, home equity lines of credit, credit cards and auto loans.
“These delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment or in grace periods and therefore temporarily not” considered delinquent, the New York Fed said in November. That implies that delinquency rates would be twice as high, the Fed said.
TransUnion estimates the delinquency rates for federal loans were 12.3 percent as of March and 5.3 percent for private loans.
WHAT ARE DEFERMENT AND FORBEARANCE?
A deferment is a temporary pause to student loan payments for specific situations, such as re-enrollment in school. A borrower may receive a deferment on federal student loans for certain periods.
The U.S. Department of Education has published a list of qualifications for a deferment.
They include unemployment or inability to find full-time employment; economic hardship, including joining the Peace Corps; and active-duty military service.
Borrowers don’t have to pay interest during deferment if he or she has a subsidized loan.
For subsidized federal student loans, the Education Department pays the interest on a loan while a student is in school and during deferment. Subsidized loans are given to students who demonstrate financial need.
If a borrower has an unsubsidized loan, he or she is responsible for the interest during deferment. If the interest is not paid, it will accumulate and be added to the loan balance, and the amount in the future will be higher.
A borrower must apply for a deferment with a loan servicer, and he or she must continue to make payments until deferment is granted.
Private student loans may or may not have a deferment option, and the rules vary among lenders. Contact a loan servicer to explore this option.
If a borrower can’t make scheduled loan payments and doesn’t qualify for a deferment, a loan servicer may grant a forbearance. With forbearance, a borrower may be able to stop making payments or reduce the monthly payment for up to a year. Interest will continue to accrue on subsidized and unsubsidized loans.