The Rise in Educational Loan Defaulters in the United States

It is not the lending authority alone which suffers when a student loan defaults, the students, who default equally suffer. Sometimes, in fact, their sufferings tend to be worse. When a student defaults on an educational loan repayment, their credit rating suffers and this negatively impacts all future loans and even jobs. However, it is not that every educational loan defaults because the debtor wants to. Newspaper reports, in a survey, have found that at least some of the defaulters are unable to repay because of circumstances – illness, financial problems et al. The credit rating system is not programmed to distinguish between the wilful defaulters and unwilling defaulters.

According to Deanne Loonin, who is an attorney with the Boston-based National Consumer Law Center and who plays an important role in directing the Student Loan Borrower Assistance Project, “The system is extremely unforgiving.” Loonin further adds, “We’ve chosen, as a public policy, very punitive collection. From a taxpayer-return point of view, it makes more sense to help them succeed.” It indeed seems that the system tends to consider every default as deadbeat, without taking into account the circumstances that led to the default.

Some grim statistics

The rate of student loan default is on the rise – both private student loans and government loans. It has been estimated that almost 37 million borrowers owe in excess of $ 1 trillion and more than 5 million people have already defaulted. A majority of these loans are federal student loans. The U.S. Department of Education monitors educational loan repayment for the first three years after the loan is disbursed. Based on data, it has been established that 13.4 percent of the borrowers tend to default within the first three years of taking the loan. It is a worrying guess of what happens when the loan tenure goes beyond three years.

According to a survey, since 2007, the U.S. government has filed almost 16,000 lawsuits against educational loan defaulters. Of the total lawsuits, in excess of 73 percent were filed almost after a decade of default while almost a third of the lawsuits were filed after 20 years of default. Obviously, the government has been making a tardy progress in case of lawsuits for educational loans.

What is the way out?

The entire system needs to reform if the loan defaults are to reduce. First of all, the system must be able to distinguish between wilful defaulters and defaulters who were forced by circumstances. Each time a default is reported, elaborate assessment must be made of the circumstances that caused the default. The authorities must assess the financial situation of the defaulter and submit their assessment. Based on the assessment, the defaulter could be granted an extension in loan term, relief or even waiver.

Even reducing cost of education could help the loan defaulting problem to a great extent. Right now, exorbitant education costs compel many students to take loans which they possibly cannot pay back. An affordable education system will certainly help matters.