Delinquency and Default, Partners of Despair

By Steven Panagiotakos, Senior Policy Advisor, Greenwood & Hall

You’ve got to walk before you run and you’ve got to be delinquent before you default. To remedy student loan default, you have to first deal with student loan delinquency, that’s according to a recent study by the Institute for Higher Education Policy. In its report, entitled “Delinquency: The Untold Story of Student Loan Borrowing”, the institute empirically makes the case that student loan delinquency is pervasive, adverse and should be viewed in conjunction with default.

Delinquency is defined as failure to make a payment within 60 days of its due date. Default is usually delinquency which lasts more than 270 days (360 days for FFEL or Direct Loans). Therefore, you have to get lost in the woods of delinquency before you fall into the abyss of default. But, as the study does point out, some who are delinquent do find their way out of the woods.

The study reviewed the payment history of 8.7 million student loan borrowers who were to begin repayment between October 1, 2004 and September 2009 with a more in depth focus on those who were to enter repayment in 2005. The results were sobering and when combined with student loan default, gave a much more complete picture of the entire student loan repayment problem – a picture that should concern us even more than just student loan defaults.

Out of the 2005 cohort (1.8 Million) of borrowers, 26 percent were delinquent at least once in their first five years of repayment and 15 percent defaulted during the same period. That means 41 percent of all borrowers had an adverse repayment experience. And when you factor in the 23 percent who were able to delay their repayment through deferment or forbearance, only 37 percent were able to make timely payments (note percentages do not sum to 100% due to rounding). That means only one third of all borrowers were able to stay current during the first five years. Does that mean that many of our students are being setup to struggle and some to fail? If so, then the effects can be severe and protracted.

The possible negative consequences of default are:

• A negative credit ratings for 7 years which can make it difficult or impossible to borrow to buy an auto or home
• Aggressive collection actions
• A lawsuit against you for entire amount and collection and  litigation costs
• Addition of higher interest rates and collection costs to your balance
• No discharge in bankruptcy
• Garnishment of wages, tax refunds or other federal benefits
• Ineligible for deferments and future student financial aid
• Loss of any subsidized interest rate on loan
• Ineligible for Armed Forces service
• Denial of a professional license
• Lien on your home

For those who are delinquent, the consequences aren’t quite as draconian but a negative credit rating can adversely affect getting a job, finding an apartment, or purchasing a house, a car or any other consumer product or service needing financing. These are serious lifestyle ramifications and all for a loan that was to help a student achieve his or her American dream.

There is no doubt, that after this study, it is clear that default and delinquency need to be viewed as one. Let’s term it “student non-compliance” and use this combination as the true thermometer for student loan wellness.

The report drilled very deep in trying to discover the areas of high risk for student non-compliance. And what it unearthed is not surprising but still concerning.  

The borrowers that earned their degree or certificate had a 22% delinquency and a 16% default for a 38% non-compliance. Whereas, those who did not earn a degree or certificate had a 33% delinquency and a 26% default for a 59% non-compliance

Those who last attended a two year public or for-profit or a four year for-profit had twice as high Non-compliance as those who last attended a four year public or private.  

And, those whose highest grade level was first-year undergraduate had a 64% Non-compliance (30% delinquency/34% default) compared to a 27% non-compliance (21% delinquency/6% default) for those whose highest grade level was fourth-year undergraduate.

 Very simply, if you want to enhance student loan wellness, then it’s retention, persistence and graduation. There might be other factors to further examine but from this study, student success is one of the key remedies. Retaining them to the highest level and completing them at a higher rate will certainly act as countering force to student loan non-compliance.

When a borrower drifts into delinquency, interest rates and collection fees can cause the principal balance to balloon by two or three times. We’ve all heard the student loan horror stories featured in books like “The Student Loan Scam” or articles like the New York Times (April 9, 2009) “In Grim Job Market Loans Are A Costly Burden” or programs like the expose by NBC “Price of Admission, America’s College Debt Crisis”.

Although many of us have thought these extreme accounts have been anomalies, this study certainly lays a foundation that would make them much more prevalent. To dismiss them as sensationalism, is a mistake because they are representative accounts of a certain number of  borrowers’ experiences and are degrading the American public’s view of higher education and its value.

Steven Panagiotakos
Greenwood & Hall
spanagiotakos@greenwoodhall.com

Steven Panagiotakos is the Senior Policy Advisor at Greenwood & Hall. From 1993-2011 he was in the Massachusetts House of Representatives and the Massachusetts Senate, where he was the Chairman of the Ways and Means Committee.