Recent numbers from the Federal Reserve Bank of New York have spurred lots of stories about the fact that low-balance student loan borrowers, those with debts less than $5,000, struggle more with repayment than high-balance borrowers. High-balance borrowers, those with $50,000 and more in education loan debt, tend to be those who borrowed for both undergraduate and graduate school study.
It’s true that borrowers with less student debt actually default in higher numbers. Borrowers who drop out of college rack up less debt because they’re not in school for as long. Without a degree or certificate, these borrowers are less likely to earn the income needed to retire the debt and, therefore, are at a higher risk for default.
The Federal Reserve numbers show that more than 30 percent of borrowers who left school in 2009 owing less than $5,000 in student loans experienced a default. On the other hand, that same study shows only about 15 to 20 percent of the high-balance borrowers of the 2009 cohort have defaulted.
But just because these individuals don’t default, it doesn’t exactly mean repayment comes easy.
In fact, according to the Federal Reserve, “borrowers who start out owing more than $50,000 are at risk for bad outcomes almost to the same extent as small-balance borrowers owing less than $5,000.” That’s because default, which doesn’t officially occur for federal student loans until 270 days of nonpayment, isn’t the only bad outcome.
Being behind on your monthly payments can damage your credit record, making it harder to secure employment, rent or buy a home, purchase a car, or access other forms of credit. The Federal Reserve
study of the 2009 cohort shows between 10 and 15 percent of high-balance borrowers fell behind on payment for four months or more.
Another not-so-great outcome for borrowers is the failure to pay down debt. According to the New York Federal Reserve, “of high-balance borrowers, 22 percent have student loan balances higher in 2014 than they did in 2009, even without ever falling into severe delinquency or default.” It also noted that balances continue to grow as borrowers make payments that don’t keep up with the accruing interest.
That’s not always a worst-case scenario for the borrower. More and more high-balance borrowers are beginning to take advantage of income-based repayment programs that require only small payments tied to income and forgive any outstanding balance after 10, 20 or 25 years.
Taking advantage of income-based repayment plans can help borrowers more effectively balance education debt payments with other financial priorities. It’s definitely better than letting student loans slip into delinquency and default. But it can also mean holding an increasing load of debt on your credit record, which could diminish your chances of securing other types of credit.
The use of deferments and forbearances to postpone payment of a federal student loan is another reason a borrower’s balance could be increasing over time, but not going delinquent. Deferments and forbearances can be lifelines to borrowers facing imminent delinquency or default, but they can also result in added interest over time, as well as capitalization – the process whereby accrued interest is added to the principal balance and interest is then charged on the new larger balance.
Deferments, and especially forbearances are, often the path of least resistance as far as requirements and paperwork, but they’re also not usually the best long-term solution.
If you’re using a forbearance to stall repaying your loan because you can’t afford it – and you don’t expect your financial situation to change in the near future – contact your servicer and switch to a different payment plan. As mentioned above, the income-based repayment options may still not amortize your loan, but at least you’ll be working toward that forgiveness.
All this isn’t to say that borrowing for graduate school is a bad idea. That’s a personal decision that every potential graduate student must weigh carefully and consider all the pros and cons, financially and otherwise.
But it does mean that graduate students need to be aware about the ramifications that go into increasing their overall education loan balance. And policymakers need to look at the entire range of study loan repayment outcomes and not limit their definition of struggling to only those borrowers in deepest distress.
According to the New York Federal Reserve, nearly 10 years out of college the 2005 cohort of student loan borrowers has paid down only 38 percent of its original student debt. Those are numbers that could impact us all if they stunt our economic recovery.
Education loans in india 