I have frequently referenced a paper for a higher ed finance class this semester that was featured today in a Los Angeles Times article on the big picture of student debt.

The Institute for Higher Education Policy study of federal student loans, Delinquency: The Untold Story of Student Loan Borrowing, suggests that a majority of students struggle to repay their loans.  As the cost of a higher education has increased exponentially over the last couple of decades, policymakers have relied solely on default rates as a measurement tool.  An institution’s default rates can impact their ability to provide loan borrowing to students.  This study suggests that default rates alone provide an incomplete analysis, as they exclude borrowers who have difficulty repaying their loans but who avoid default.

This study consists of a review of federal student loans only, not private lending.  It focuses on the nearly 1.8 million borrowers who entered into repayment on loans obtained through the Federal Family Education Loan Program in 2005 during their first five years of repayment.  It details the rates at which borrowers entered into default; into deferment, a temporary suspension of loan payments for re-enrollment in school, unemployment, or economic hardship; forbearance, temporary suspensions of a borrower’s payments because of financial difficulty; and delinquency, or late payment on a loan.

Overall, only 37 percent of the borrowers in the study managed to repay their student loans throughout the study period without postponing payments or becoming delinquent. Another seven percent entered into deferment because they re-enrolled in school.  A majority, 56 percent of borrowers, had difficulty making timely payments on their loans.

Of the 56 percent with repayment difficulty, 15 percent of borrowers used deferment and forbearance to postpone their payments and avoid delinquency.  Overall, 41 percent of the student loan borrowers became delinquent or defaulted.  Twenty-six percent of borrowers became delinquent, but did not default.  Approximately 15 percent of borrowers became delinquent and defaulted.

Delinquency and default have serious consequences for student loan borrowers and can affect credit scores and the ability to obtain mortgages and auto loans, and the terms upon which those loans are offered.  Borrowers who default face even more severe consequences, including wage garnishment, withholding of income tax refunds or Social Security benefits, the turning over of the defaulted loans to collection agencies, and liability for collection and court costs.

There were important distinctions made between borrowers.  Undergraduate and graduate borrowers who left school without graduating were far more likely to become delinquent or default than those who graduated.  Graduate students were far more likely to make timely payments without using deferment or forbearance and less likely to become delinquent or to default than undergraduates.  Students at public four-year and private, nonprofit four-year institutions were more likely to repay their loans on time without resorting to deferment or forbearance and less likely to default on loans.  Students at public and for-profit two-year institutions and for-profit four-year institutions were the most likely to experience repayment difficulty.