How Many Students Are Having Loan Repayment Difficulties?
Student loan repayment rates have received a great deal of attention recently, and for good measure. A recently released report by the New York Fed showed that Americans had $1.12 trillion in outstanding student loan debt as of June 30, 2014, which was up more than ten percent during the past year. Fully ten percent of students who left college in 2011 defaulted on their loans within two years, the highest level since 1995. This is in spite of increasingly generous income-based repayment programs that can result in students not being required to make payments if their household income falls below 150% of the poverty line.
The U.S. Department of Education’s Federal Student Aid (FSA) office recently released summary data on the federal government’s student loan portfolio, including spreadsheets containing the number of borrowers in repayment, delinquency, deferment, and forbearance as well as the dollar values in each of those categories. Data are available from the third quarter of Fiscal Year 2013 to the third quarter of Fiscal Year 2014, primarily for the Direct Loan portfolio in which the federal government takes full lending authority. (The Federal Family Education Loan portfolio still exists, but no new borrowers can enter that program.)
Table 1 shows the Direct Loan volumes (in billions of dollars) for the last year for each repayment category. I do not use the number of borrowers here because it is possible for borrowers to be in multiple categories, while each dollar is unique. In the last year, the Direct Loan portfolio has grown from $569 billion to nearly $686 billion, while the amount being repaid on time has risen from $193.5 billion to $248.6 billion. $178.9 billion is currently held by students who are still in school or in a grace period just out of school, with the remaining funds in a wide variety of categories with often ambiguous meanings.
A recent Huffington Post article by Shahien Nasiripour showed the general public some of the concerns with student loan repayment using FSA data. It had the headline of “Half of Federal Student Loan Borrowers Not Paying on Time,” and noted that only about 49% of students who are no longer in college are actively repaying loans. Nasiripour calculated this by dividing the amount of loans in current repayment by the amount of loans not in the in-school or grace periods, assuming (given a lack of better data) that the dollar value matches the number of students. But as summarized in this blog post from The Chronicle of Higher Education, there are a lot of reasons why calculating a default rate can be difficult. The table below summarizes four different repayment rates using different definitions of what loans should be considered as being under repayment:
All of the repayment rates use the dollar values of loans in current (on-time) repayment in the numerator, but the denominators differ.
Rate 1: Dividing current repayment by all loans except the in-school and grace period categories. This is what Nasiripour used in his Huffington Post piece and results in a 49% repayment rate. This understates the repayment rate, as it counts students in deferment and forbearance as not repaying loans, even though students can request deferment or forbearance for good reasons (from a societal perspective) such as attending graduate school or serving in the military as well as for financial hardships. But as I noted in Nasiripour’s follow-up article, we cannot tell with available data how many students are using deferment or forbearance for each purpose.
Rate 2: Dividing current repayment by current, delinquent, and defaulted loans as well as loans in forbearance. Here, I excluded deferments and “other” as a rough proxy for people who have a non-hardship reason to delay payment given a lack of exact data on forbearance and deferment reasons. That results in a repayment rate of just over 60%.
Rate 3: Dividing current repayment by current, delinquent, and defaulted loans. This rate excludes loans in deferment and forbearance, as they will be included after these temporary statuses come to an end. This yields a 74% repayment rate.
Rate 4: Dividing current repayment by current and delinquent loans. This excludes defaulted loans, with the assumption that those loans will never be repaid. This results in an 83% repayment rate.
So what is the right measure of student loan repayment rates? My preferred estimate would be something between the second and third repayment rates—or about a 70% repayment rate—due to a lack of solid information about why people defer payments or go into forbearance. But this comes with a giant caveat about income-based repayment. If IBR programs are effective in targeting students who may face financial hardship, then repayment rates should increase. However, the benefits to students have to be considered against the cost to taxpayers.
About The AuthorRobert Kelchen, PhD
Robert Kelchen is an assistant professor in the Department of Education Leadership, Management and Policy at Seton Hall University and is the methodologist for Washington Monthly magazine’s college rankings. His research interests include student financial aid, accountability policies, and program evaluation.