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A closer look at the trillion

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A few weeks ago, we released new estimates on the size of the student loan market, which is approaching $1.2 trillion, with federal student loans crossing the $1 trillion mark. While there’s been a lot of discussion about changes to federal student loan interest rates on new loans, many of you have asked: what’s happening with the trillion that’s already been borrowed?

We took a closer look and here’s what we found: there are over 7 million borrowers in default on a federal or private student loan. We also estimate that roughly a third of Federal Direct Loan Program borrowers have chosen alternative repayment plans to lower their payments.

To learn more, we decided to analyze data released from the Department of Education, pulled from the National Student Loan Data System. We took a close look at the Federal Direct Loan and the Federal Family Educational Loan (FFEL) Programs. Federal loans also include the campus-based Perkins Loan program, which represent less than 1% of the total outstanding. The data below represent loan status as of June 2013.

Repayment status for federal student loan programs

Outstanding balance including accrued interest in billions of dollars

In-school Grace Repayment Deferment Forbearance Default Other Total
Direct 133.8 (24%) 40.4 (7%) 237.4 (42%) 75.6 (13%) 48.3 (8%) 30.5 (5%) 3.2 (1%) 569.2 (100%)
FFEL 12.2 (3%) 6.6 (2%) 256.3 (60%) 46.5 (11%) 42.8 (10%) 58.8 (14%) 6.3 (1%) 429.5 (100%)

Number of recipients in millions

In-school Grace Repayment Deferment Forbearance Default Other Total
Direct 7.9 (28%) 1.9 (7%) 10.8 (39%) 3.2 (12%) 1.8 (6%) 2.1 (8%) 0.1 (0%) 27.8 (100%)
FFEL 0.9 (4%) 0.5 (2%) 12.9 (56%) 2.3 (10%) 1.6 (7%) 4.4 (19%) 0.3 (1%) 22.9 (100%)

It’s hard to compare the Direct and FFEL programs to each other, since a much larger portion of Direct Loan borrowers are still in school. In addition, no new loans have been made through the bank-based FFEL program since 2010. Many borrowers have both types of loans. Here’s a closer look at the estimated average balance for borrowers in each loan status:

Average balance by repayment status for federal student loan programs

Outstanding balance including accrued interest in thousands of dollars

In-school Grace Repayment Deferment Forbearance Default
Direct 16.9 21.3 22.0 23.6 26.8 14.5
FFEL 13.6 13.2 19.9 20.2 26.8 13.4

A noteworthy number of borrowers are in default. Defaulting on a federal student loan has serious consequences. Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order. However, there are options to get out of default and get the default notation on your credit report removed.

There are ways to avoid default on a federal student loan, even when you think you can’t afford your payment. Here’s a closer look at the repayment plans Direct Loan borrowers are choosing:

Repayment plan choices by federal direct loan borrowers

Includes loans with known status in repayment, deferment, and forbearance

Outstanding balance
Billions of dollars
Recipients
Millions of recipients
Average balance
Thousands of dollars
Standard 10-year plan 139.9 9.84 14.2
Plans based on income 72.3 1.58 45.8
Income-contingent repayment 20.1 0.63 31.9
Income-based repayment 50.9 0.91 55.9
Pay as you earn 1.3 0.04 32.5
Plans not based on income 107.4 3.35 32.1
Extended repayment 62.1 1.63 38.1
Graduated repayment 27.8 1.27 21.9
Extended graduated repayment 17.5 0.45 38.9
Other alternative repayment plan

4.4 0.23 19.1
Total of loans in these plans 324 15 21.6

Borrowers looking to reduce their payments can choose a plan where their monthly payment can be tied to a portion of their income after submitting documentation. The newest of these plans is Pay As You Earn, where your payment is equal to roughly 10 percent of your income above the poverty line. After 20 years, any remaining balance you might have is forgiven.

There are also plans that allow you to extend your payments over a longer time period (extended repayment) or to have your payments increase over time (graduated repayment). You can also combine both features (extended graduated repayment). All of these plans will incur more interest over the life of the loan, but don’t require much documentation to enroll in.

Roughly a third of Direct Loan borrowers in repayment, deferment, or forbearance are enrolled in an alternative repayment plan. Most of these borrowers are enrolling in plans that don’t require income documentation. Based on the average balances we estimate for borrowers in each plan, it’s possible that many borrowers in plans not based on income might be better off with an income-based plan. If borrowers were aware of and able to easily enroll in income-based plans through their servicer, many federal student loan defaults could have been avoided.

We recently released a report that analyzed input from consumers, industry, and experts about the potential impacts of unmanageable student loan debt and how to spur affordable repayment and refinance options for private student loan borrowers.

We’ll keep monitoring the student loan market to understand how it’s working and to help consumers navigate a complicated system. To learn more about student loans, check out Ask CFPB. You can also check out reports and other information on our work for students, visit consumerfinance.gov/students.

Rohit Chopra is the CFPB’s Student Loan Ombudsman.

  • Kelley L. Allen

    While federal loans offer help to those of us who are struggling in this economy, private lenders are horrible. My own experience, and those of many others I know, with Sallie Mar are horrific. For those who are unfortunate enough to have borrowed through Sallie Mae, we have no options and seemingly no where to turn for help. That company will not work with you for lower payments, tack on exorbitant fees and are horrible to deal with. My sister, for example, saw a $28K loan balloon to $49K from fees – not interest – in less than a year. These private lenders, in my opinion, are where those who can make changes should focus. There is no way out, and so many college educated people who would otherwise help stimulate the economy cannot because of unscrupulous practices that are just as bad – if not worse – than the subprime mortgage crisis.

    • Rick Newman

      Hi Kelley. Sallie Mae is a government “corporation,” not a private company. Which makes your point even more poignant since there ought to be something Washington can do about Sallie.

      • Craig P Anderson

        Rick, Sallie Mae privatized in 2004. It is no longer a government corporation.

        • Rick Newman

          Didn’t realize. Thanks.

  • jennifer

    Rohit – Thanks for your article. I’m curious to know why the government hasn’t removed itself more from direct lending now that the economy and markets are on the mend. The default metrics you state above show pretty clearly that the taxpayer is footing this bill. Wouldn’t it be wiser to aid the growth of private lending so that taxpayers aren’t left with another looming bailout? It just seems like this is the path we’re heading down. I’ve read that default metrics in the private sector are significantly better because the majority of those loans have co-signors and FICO scores in the low to mid 700′s.

    • Mike

      Although your response is appreciated, please note that the FFEL program is funded by the private lending industry (it is guaranteed and subsidized by the federal government, but the capital originates from the private lending sector) and, based upon the metrics you cite to above, sports approximately twice the default rate of the Federal Direct program.

      Furthermore, please note that the worst rate of default is listed at 19% above, indicating that at worst, 80% of the college educated public, not the taxpayer, is footing the bill.

      I appreciate your opinion, but would have to respectfully disagree that forcing the previous generation to shoulder the burden of this generation’s college debts is helpful when it comes to avoiding bailout. I would also refer you to Kelley Allen’s post above, as it is fairly consistent with materials I’ve read about the private lending industries intransigence and tactics leading to increased default by primary borrowers.

      • Rick

        Mike, you have to look at the data behind the tables published above. Rohit was careful to deny the usefulness of comparing the FFEL and Direct numbers above directly. Rightly so – Direct loan balances and borrowers are heavily weighted to the past three years. With deferment and forbearance they’ve hardly had time to default yet.

        In pools of loans from similar vintages, FFEL loans outperform Direct because of superior servicing; that gap may well close now that ACS doesn’t have the sole Direct servicing contract.

        Since the credit bubble popped, private student loans have outperformed both FFEL and Direct.

        • Craggie

          Actually, in pools of loans from similar vintages, DLs outperform FFELs because of superior servicing (and because of one set of rules rather than a dozen or more); that gap may well close now that DoE no longer has one set of rules for the plethora of new loan servicing contractors implemented since 2009.

    • Craggie

      Federal student lending is a huge money-maker for the taxpayer. And, except for periods of very tight underwriting on the private loans, the direct and government-guaranteed loans have outperformed the private loans. There is no comparison to the mortgage market.

      • jennifer

        private loans that are subsidized by the government aren’t truly private loans. if you look at non-subsidized private lending, the default rates are significantly below the federal direct lending or FFEL programs.

        • Craggie

          The method is basically the same exactly way you would do your accounting if you started a bank. That was the whole purpose in switching from cash accounting to accrual accounting in 1991. It runs like a typical bank. Are you saying that, if you opened a bank on December 31 and issued $1 million in loans that day, then you would post a $1 million loss for that calendar year? Those loans are assets, and you would figure out the net cash generated on those loans over the next few years. You would set up a reserve for losses. it would be an estimate but, if you had been running a bank for decades, you would be getting pretty accurate. If not, you would adjust your estimate downward if you saw over the next years/decades that your defaults were lower than you had estimated. If defaults were higher than you had estimated, then you would re-estimate upward the defaults forecast for those past vintages.

          “It is not as simple as interest generated on loans pays the interests on the debt minus operating costs lead to a profit or a loss.” No it isn’t. that’s why there are hundreds of other factors in the formula.

          “The fact they discount the value of all loans at orgination based on assumptions of cash flows and standardized default rates, which hides the true value of the loans generated and also the repayment schedule with the Treasury defies logic.” The value is not discounted. The cash flows are discounted. Do you think a payment to a bank in 2030 has the same value as a payment to the bank in 2015? Do you think a cost to a bank in 2030 is as heavy as a cost to the bank in 2015? If not, you need to use a discount rate of some kind. Using a basket of zero-coupon bonds as a discount rate is not implying that the student loans themselves are no riskier than zero-coupon Treasuries. The default rates are not “standardized.” They are based on historical data and the forecasts if new data indicate that the forecasts were too high or too low. Same with recoveries. All the risks are incorporated in the forecasts. What if defaults or repayments are correct over the lifetime but are far more volatile/inconsistent annually than anticipated? Then you need to incorporate some stress-testing into your original forecasts. It doesn’t mean you throw out the baby with the bath water, and trade in a banking approach for a cash-accounting approach.

          A closer look at the program features themselves also shows how the federal government makes money either way. If someone starts paying from day one, the loans are repaid, with interest. Win for the taxpayers. If someone goes into forbearance, then more interest accrues, and capitalizes when the forbearances end — all of which the borrower has to repay eventually. Another win for the taxpayers. If the borrower defaults, then fees and charges get tacked on, in addition to simple interest accruing, all of which the borrower has to repay eventually, as bankruptcy is almost impossible to achieve. Yet another win for the taxpayers. Even most borrowers, let’s say, scheduled to get income-driven repayment forgiveness in 2040 will pay more interest before forgiveness than if the borrower had stayed with 10-year standard. And the loan forgiveness is taxable as well.

          Whether these taxpayer wins are actually wins for the borrower depends on your ideological standpoint. One thing that everyone should be able to agree upon is that defaulting on a loan is tragic for a borrower’s economic future. Another thing that is clear is that, with all the repayment features, there is really no reason why anyone needs to default.

  • Quentin Wilson

    Why not replace the government-run program with a government back-stop that forces private investors to take the initial loss before guaranteeing the remaining loan balances? It could be based on the same principles as the housing finance plan the President announced today in Phoenix.

    • Ken O’Connor

      Quentin, that is a very viable idea. The current debt financed education model using Federal Direct Lending does not reflect the real risks associated with human capital development AKA going to college. IBR and PAYE papers over risks by extending terms and reducing minimum payments, but does not address the real risks observed at the time of loan origination.

  • Kamran

    When are universities going to be responsible for this mess? I attended UCLA from 2003-2005. My major was International Development Studies. Again and again and again I was promised good paying jobs in my field. Again and again I was said that there is a HUGE need in that field.
    5 years later and with lots of dead-end job I ended up going back to a community college and get a trade certificate. The community college was almost free and that certificate is what is making money for me.
    UCLA degree proved absolutely worthless! My degree in IDS is a fraud, so are many majors offered by UCLA. They lure people in, ruin our lives with student loans, and yet are not being held accountable.
    Now this was UCLA.
    Imagine how people who graduated from Devry or other 3rd or 4th or 20th tier school feel. It’s fraud!
    Now UCLA is a public school.
    How can anybody sit back and let FOR PROFITE SCHOOL LIKE DEVRY get away with this?
    While Mr. Daniel Hamburger-the CEO-of Devry “university” made a cool 16.7 MILLION dollars last year, many thousands of students of Devry (some of my friends) are working at Wal-Mart for $9/hour with $20,000-50,000 in debt!!

    • rporter

      Devry is not the only culprit – look at the growth of internet schools who “bilk” the under-educated students out of thousands of dollars for useless certificates that are sold to them as associate degrees. One should wonder if you would want to be treated by a nurse who got their degree from online studies.

      • Kamran

        But Devry is one of the absolute worst. They were in court because they had recruited students from mental facilities. I have listened to conference calls of this company. These guys are criminals. They have found a great loop hole. They find misinformed individuals, former gang members, drug adicts, people in poverty, and they sign them up. And the first thing they do is get them FEDERAL student loans.
        My problem is this:
        1) Devry is using our tax money for their profits.
        2) Non of Devry universitiy’s (the word university being used very loosely) student can ever pay back those loans
        3) It was in 2008 or 2009 that Devry took Crysler’s place in S&P 500.
        How can crooks like these who basically steal money from government, and ruin young misinformed people’s lives end up in S&P 500??!!

  • Ryan Salek

    Agreed with Kelley, Private loan borrowers need help now! Outrageous fees and interest have trapped many borrowers into a lifetime of debt they can never repay no matter how hard they try to get ahead. Programs to help re-structure or help loans bloated out of control are just not there and the borrower has very few rights.

  • CarmanK

    The greatest asset for any nation is its work force. Investment in college education grows the economy and an educated work force which is necessary to strengthen our democracy. Democracies die throughout history, when people get lax in their civic duties. I like Sen E Warren’s suggestion, tie loans to same rate as banks receive from the fed. What they are charging now is usurious and exploitive. I had to have deferral because husband was dying and had to concentrate on and care for him. I ended up with a $15,000 loan, went to $36,000 and will require $50,000 to pay in full. There is something very wrong with what is happening in student loan market, considering that college education is getting more expensive and the PRIVATIZERS are bilking so many students. What happens to the colleges that overcharge and dont produce. This agency needs to get on top of all this and soon.

  • Paul Combe

    Rohit,

    Thank you for the data.
    For far too long, the only data we have had for federal student loans are
    how much was originated and how much defaulted.
    This lack of data gives a very incomplete picture to the public and
    policy makers alike masks the overall impact of student debt on the consumer
    and the overall economy. Thank you for filling in some of the blank
    space. I would make two suggestions to strengthen
    the data: firstly, this should not be a
    one off report. This quality of data
    should be published regularly both for the aggregate pool of borrowers as well
    as for cohorts. Secondly, I would add a “Delinquency” status to the
    report. Federal student loans have a
    long (270 day) delinquency period. Not
    including this status continues the misperception that Borrowers are either in
    default or in good standing. Delinquency
    also affects borrowers’ credit score, their future cost of credit, and impacts
    the greater economy probably more than default and this data point should be
    reported along with default data.

    • Kanisha Little

      Hey guys, I have a question. I am still in school and i am borrowing money from these different corporations/agencies. Since i am still enrolled in school, my advisor stated the government pays the interest. I was thinking about paying these before i am out of school thru monthly installments. Do you think this is a great idea? So when i finish, i don’t have it to worry about.

      • betsy514

        Hi Kanisha. I think you should double check what types of loans you have as very few borrowers end up with 100% subsidized loans. This paired with your statement that you borrowed from multiple agencies tells me that you also might have private student loans, which are never subsidized. As far as your questions goes, if you have the funds, you should start by paying any accrued interest (if you have any) and if you can pay more, absolutely do it – will likely save you quite a bit in overall interest charges in the future. Just make sure you’re not incurring other debt by using this savings to pay off your student loans – i.e. make sure you keep an emergency fund on hand so if something happens you don’t have to resort to credit cards.

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