By Kim Clark
August 20, 2015

The percentage of federal student loan debtors who are behind on their payments, while still shockingly high, is declining, the U.S. Department of Education reported today.

The proportion of borrowers who are more than 31 days late in their repayments fell by more than 2 percentage points, to about 21%, in the last year.

Financial aid experts said that while heartening, that still means that more than 1 out of 5 people whose federal student loan payments are due—because they either graduated or dropped out more than six months ago—are behind on their bills. (The government issues automatic payment deferrals to borrowers who are enrolled in school at least half-time, so current students are not considered delinquent.)

“Declining delinquencies are a good thing,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “Whatever the reason for the drop, more borrowers are steering away from the terrible consequences of defaulting,” which are triggered when a borrower falls nine months behind in payments and can result in big fines and long-lasting credit problems, he said.

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Draeger and other experts pointed to four main reasons delinquencies have fallen:

  • The improving economy has created jobs that are allowing more debtors to earn money to pay back their loans.
  • Families have paid down many other debts and thus can better afford their student loan bills.
  • More colleges are reaching out to graduates to help them apply for the best repayment options, in part because of toughened government penalties against colleges whose alumni have high default rates.
  • More debtors are taking advantage of the government’s “income-driven” repayment plans. The Education Department said that almost 4 million debtors have now signed up for one of the flexible repayment options, an increase of 56% in the last year.

The federal government now offers a dizzying array of income-driven repayment options, but the standard plan adjusts debtors’ payments to 10% of their disposable income. Disposable income is defined as any amount above 150% of the federal poverty line, or $17,655 for a single person. So anyone earning less than that would have their payments waived entirely until they earned more than the cutoff.

The flexible payment plans, while attractive in theory, have been criticized by borrowers and some federal investigators. The Consumer Financial Protection Bureau announced this week that it was looking into borrowers’ complaints about slow processing of applications.

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In addition, some naïve borrowers have been shocked to learn that when their payments are waived or are reduced below the cost of the interest, the total size of their loan keeps rising. It is standard practice for lenders of all types to add unpaid interest to a debt. A recent study by the Federal Reserve Board of New York found that about one-third of all student loan borrowers are making payments on time, but the payments are so small that the size of their debt is growing.

The government’s new income-driven repayment plans do offer some hope for such borrowers, however, since those who keep making their payments for at least 20 years (or just 10 years if they work in a public service job) will have any remaining balance forgiven.

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