Student Loan Debt, Reframed

WASHINGTON -- Much of the discussion about college student debt revolves around the 15 percent of borrowers who default on their loans, with federal policies assessing institutions' quality in part on the proportion of their graduates who default and advocates for students pushing to win (back) bankruptcy protections for those who face that crushing fate.

Yet all the attention to that relatively small (but growing) slice of borrowers tends to create the impression, says Alisa Cunningham, a researcher at the Institute for Higher Education Policy, that "everyone else" is in just fine shape, debt-wise. Yet a study released Tuesday by the nonprofit think tank suggests otherwise, showing that a majority of borrowers at least delay some loan payments, and a full quarter (26 percent) actually go into delinquency on their debt at some point during their first five years of repayment.

And those delinquent borrowers face some if not all of the painful ramifications of the higher-profile loan defaulters, including damage to their credit scores and future borrowing ability, and are far less likely to finish college than are their peers who pay off their loans on time, the study finds.

"The default figures lead to a misleading impression that few students are struggling," says Alisa F. Cunningham, vice president of research and programs at the higher ed policy institute and a co-author of the paper, with Gregory Kienzl, IHEP's director of research and evaluation. Defaults alone do not "fully capture the extent of the problems that many borrowers are facing."

The federal government has held colleges accountable for the rates at which students at individual colleges default on their federally subsidized loans since the early 1990s, on the theory that doing so would weed out fraudulent schools and force other institutions and lenders to take the issue of student debt more seriously. The rates fell sharply through the 1990s and early part of the 2000s, before edging up in recent years as graduates' economic prospects dimmed.

Critics have long argued, though, that the government's method of calculating default rates may mask many struggling borrowers, especially if colleges -- to avoid higher default rates that can threaten their students' access to federal financial aid -- encourage them to take advantage of deferments, forbearances, and other options that allow them to postpone repayment. (The Education Department's proposed regulation to require for-profit colleges to show that they are preparing students for "gainful employment" would count borrowers who are in deferment or forbearance as not in full repayment, to the dismay of career college officials.)

The study by the Institute for Higher Education Policy examined the records (provided by five large guarantors of federal student loans) of 8.7 million borrowers who entered repayment between October 1, 2004 and September 30, 2009, with a focus on about 1.8 million borrowers who entered repayment in 2005.

As seen in the table below, slightly more than a third of the borrowers in the 2005 cohort made all their payments on time, and 15 percent had defaulted within five years of entering repayment. The rest were granted deferments and/or forbearances, and a total of 26 percent became delinquent on their loans, but did not default on them -- at least within the five-year repayment period studied (an important qualification.)

Repayment Status of Borrowers Who Entered Repayment in 2005

Borrowers at for-profit colleges (two-year and four-year) were likelier than their public and private nonprofit college peers to default, and likelier than other four-year colleges to become delinquent on their loans. Borrowers who had attended public two-year colleges were likelier than other student loan borrowers to have delinquencies, although far smaller proportions of community college students borrowed than did students in other sectors.

The fact that there are two delinquent borrowers for every defaulter -- and that at least some of the delinquent borrowers may well fall into default at some point beyond what was captured in the five-year window -- suggests that policy makers and the government need to pay more attention to delinquent borrowers, the researchers said.