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Wall Street Journal / Biz - Money

The Student-Loan Problem That Won’t Go Away



By

Josh Mitchell

There’s at least one big reason the Trump administration and congressional Republicans are looking to revamp student lending.

Consider the New York Federal Reserve’s latest snapshot of household credit in the U.S.

During the recession, delinquencies on all types of consumer debt spiked. Then, starting around 2011, delinquencies on credit-card debt and auto loans, along with mortgages, dropped as unemployment fell and the economy healed.

Student-loan delinquencies never did. Instead, they continued rising through 2012 and have remained exceptionally high. At this year’s start, 11% of the nearly $1.4 trillion in student debt was delinquent—sitting in an account that hadn’t received a payment in at least 90 days. And that figure understates the problem. Roughly half of all student debt is held by borrowers who aren’t required to be making payments because they’re still in school, unemployed or for other reasons. Strike out those instances and the share of delinquent student debt is more like 22%, the New York Fed says.

That stubbornly high level is, on the surface, counterintuitive because unemployment is at a 17-year low and wages are rising. One big factor is that the government imposes virtually no underwriting standards when it lends to college and graduate students. Many borrowers had shaky credit to begin with, attended schools of dubious quality and have struggled to find well-paying jobs. Other borrowers are refusing to pay down their loans in protest, contending they were deceived by their schools. Research shows delinquent borrowers tend to owe relatively small amounts–under $10,000–but dropped out of college before receiving a degree. To bring down delinquencies and prevent future ones, the Trump administration has proposed altering the terms of a popular program known as “income-driven repayment.” Under a plan included in its annual budget outline released this week, undergraduate borrowers would pay more each month but qualify to have balances expunged sooner, relative to current law.

Specifically, borrowers would devote 12.5% of their discretionary incomes each month toward payments–up from 10% under the current plan. If their loans only covered undergraduate education, their balances would be forgiven after 15 years, instead of the current standard of 20 years. Those who borrowed for graduate school would have balances forgiven after 30 years.

House Republicans, meanwhile, are proposing changes that would be less generous for borrowers, relative to Trump’s plan, and that are designed to prevent taxpayers from covering losses on defaulted loans. Under a broad education bill unveiled late last year, borrowers would pay 15% of their discretionary incomes toward student debt, with no option for forgiveness. Instead, borrowers would make payments for however long it took reach the amount they would have paid under a 10-year repayment plan, including interest.

These proposals follow years of attempts by the Obama administration to bring down defaults, with disappointing results.

The Trump administration says one part of its plan could have a particularly big impact: It would automatically enroll delinquent borrowers into income-driven repayment and verify their incomes through the Internal Revenue Service. That responds to concerns from consumer advocates that many borrowers don’t enroll in income-driven repayment because of cumbersome documentation and bad information from contractors, known as servicers, that collect payments.

But those proposals would have little effect on what’s already on the books: Changes proposed by the administration would address only loans made on or after July 1, 2019.

RELATED

Student Aid Would Fall by $15 Billion Under GOP Bill, CBO Says (Feb. 6)

Hard Lessons From the Federal Student-Loan Program’s Coming $36 Billion Shortfall (Feb. 4)

U.S. Student-Loan Program Losing Money as Borrowers Seek Debt Forgiveness (Feb. 2)

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