A closer look at the trillion

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
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.

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