Student Loan Default Rate Could Be Worse than Thought

New Paper Reveals 31% Delinquency Rate

Student Loan Default Rate Could Be Worse than Thought
May 11, 2015

It is well known that student loans are reaching crisis proportions. The total student loan debt is near a staggering $1.2 trillion and a weak job market has hindered the ability of recent graduates to begin their repayment. The New York Fed's last report on household credit shows that, as of the beginning of 2015, approximately 17% of all holders of student loans were at least one month behind on their payments.

As grim as that may sound, 17% is a misleading number and almost certainly too low. The New York Fed has admitted as much in previous work suggesting that the real student loan delinquency rate may be nearly double the reported rate. A recent paper by the St. Louis Fed confirms this hypothesis, concluding that the real delinquency rate is closer to 31.5%


How can there be such a difference? It depends on the population of student loan holders included in the comparison. 17% represents the ratio of student loan holders in delinquency compared to all student loan holders. However, many student loan holders are not in the period when they are required to make payments on their loans.

There are millions of student loan holders who are still in school, and many others are in the six-month grace period between graduation and expected repayment of their loans. Still others are in an extended grace period allowed via unemployment or other qualifying conditions by a lender. Take all of those into account, and only 55% of student loan holders are in an active payout period and even capable of being behind on loan payments. When only that fraction is considered, the rate shifts to 31.5%.

Does that mean that of the remaining 45%, 31.5% of those are also expected to be delinquent when their repayment time comes? It is possible. The reported delinquency rate has actually been stable around 17% for several years, and the percentage of those in active payout has stayed stable at around 55%.

Consider that with more borrowers in the payment stage, the reported delinquency rate should rise (since the reported rate is a percentage of all borrowers, and a greater percentage of those borrowers are required to repay). Using St. Louis Fed data from 2004, the reported delinquency rate was 11% and only 47% of loans were in the repayment stage, for an approximate 23.4% actual delinquency rate using the St. Louis Fed's logic.

Indeed, since 2004, the reported delinquency rate rose from 11% to 17% while the percentage in repayment rose from 47% to 55%. At least things have leveled off, but we do not follow the St. Louis Fed's logic that the delinquency trend is not as problematic as at first thought.

To add perspective, consider the default rate of other forms of debt. Approximately 6.8% of mortgages are in a similar state of delinquency, credit card debt is at approximately 2%, and New York Fed data suggests that 6% of all consumer debt has some level of delinquency. The reported 17% rate is dismal enough by comparison, but 31.5% is appalling. Such a rate in any other form of debt would have Congress and the White House charging into action.

It is fair to say that the new student loan delinquency paper does not uncover a trend; it just shows a different way to keep track of the existing delinquency problem. However, the paper does shine new light on the true scope of the problem, and we hope that it will guide policymakers in a suitable direction to address the problem.

Find out quickly at what rate you can refinance your student loan.

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Roberta | 08.24.15 @ 16:05
Take all interest away from the students loans and let people pay back the original loan. You should not even be charging interest, are you a bank? Nobody nobody predicted NAFTA!! It is nobody's fault!! Take away the Interest! You can give business's perks 8 million!!!
$commenter.renderDisplayableName() | 12.06.16 @ 22:04

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