The economy's improved. Unemployment's low. Millions are enrolled in generous income-based repayment plans. So what's wrong?
More student debtors are falling behind on their federal student loans, after three years of declines in late payments—and with no clear explanation, experts aren’t sure whether to take it as a sign of distress or a temporary blip.
The share of Americans at least 31 days late on loans from the U.S. Department of Education ticked up to 18.8 percent as of June 30, up from 18.6 percent the same time last year, new federal data show. About 3.3 million Americans have gone more than a month without making a required payment on their Education Department loans—up about 320,000 borrowers.
The rise interrupts a period of 12 straight quarters of declines in delinquency rates, according to numbers dating to 2013, and comes despite the fact that the U.S. economy has improved, which normally would mean richer borrowers better able to afford their bills.
The uptick may be small compared to the 17 million debtors repaying their loans, but it surprised economists and government officials, who struggled to explain the reasons behind it.
“There's no fundamental reason for that to be happening,” said Yelena Shulyatyeva, senior U.S. economist for Bloomberg Intelligence. After all, she said, the U.S. economy has improved since June of last year, with lower unemployment, higher household incomes and increased wealth, federal data show. Consumers are more confident about the economy and their own personal finances, too, according to Bloomberg Consumer Comfort data.
“The fact that the trend has stalled is not yet a warning sign, but it is a question mark,” said James Kvaal, who was deputy director of the White House Domestic Policy Council under President Barack Obama. Kvaal attributed the last few years’ fall in delinquency rates from a high of 27.1 percent in 2013 to the stronger economy and to the Obama administration’s policies, including its expansion of generous government plans that let debtors make monthly payments based on their income, not on what they owe.
Under those income-based repayment plans, meant to help borrowers who can’t afford the typical monthly payment, even debtors with no income can remain in good standing on their loans, so long as they annually document their earnings. They’re why the Obama administration aimed for a “zero default rate," former Education Undersecretary Ted Mitchell said in 2015.
Undersecretary Ted Mitchell said in 2015.
And a growing number of student debtors is taking advantage of the plans—4.8 million now, compared to 4.2 million a year ago, Education Department data show—which makes the rise in delinquency rates particularly surprising.
Education Department officials point to two possible explanations. The delinquency rate could simply be leveling off after years of steady declines, Matt Sessa, deputy chief operating officer of the department’s student aid unit, wrote in a public memorandum last week. Or perhaps it swung higher because a sizeable number of borrowers couldn’t afford their new monthly payments, according to Chris Greene, a department spokesman. Lower monthly bills under the government’s income-based repayment plans are good for one year, during which borrowers must submit their updated earnings information by the annual deadline to continue enjoying the benefit. Hundreds of thousands of debtors effectively fell out of income-based plans over the past year, meaning they’re no longer making payments pegged to their earnings, agency data show. A 2015 department study found that borrowers who fall out of income plans often become delinquent on their debt.
Michael Tarkan, who tracks student debt as director of research at Washington-based Compass Point Research & Trading, offered three other possibilities for why more borrowers are falling behind. First, he noted that more debtors received monthly bills last quarter compared to the previous year, either because they recently left school or because they’re no longer postponing payment—and borrowers facing their first monthly bills are more likely to miss them. Second, the Education Department’s loan portfolio could be looking worse because the best borrowers may have already paid off their loans. In recent years, companies like Social Finance Inc., known as SoFi, have been making new student loans to high-earning Americans with sterling credit to pay off their federal student debt. Removing this pool of borrowers could make the rest of the feds’ loan portfolio look a bit worse.
Finally, Tarkan said, there could be a simpler reason: Maybe more Americans just can’t afford their monthly payments.
And there are some warnings signs that a growing share of consumers are struggling to pay their bills. A higher portion of previously-current consumer debt—from credit cards to mortgages to car and student loans—became delinquent during the quarter that ended June 30 than last year, according to data on loan balances compiled by the Federal Reserve Bank of New York. “Despite a strengthening economy, there’s no question that millions of student loan borrowers continue to struggle,” said Rohit Chopra, a student loan expert at the Consumer Federation of America.
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