Policy Proposal: Student Loan Default

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Along with scholarships, fellowships, and grants, student loans are an important method of financing post-secondary education. With tuition costs rising, more students are borrowing to pay for college education today. However, not all students realize the burden of paying back their student loans. Many are defaulting.
Moreover, individual borrowers are not the only ones who face the consequences of the loan default. The federal government recovers around 80% of the total defaulted amount of student loans, losing billions of dollars each year. The latest data from the U.S. Department of Education indicates that student loan default rates have been rising. Official 2011 default rate is 10%. ("Comparison of FY 2011 2-Year Official Cohort Default Rates to Prior Two Official Calculations"). The New York Federal Reserve reported that as of March 31, 2013 outstanding student debt surpassed credit card debt and was approaching the $1 trillion mark (Quarterly Report on Household Debt and Credit). If student loan default rates stay unchanged, the federal government will lose $200,000,000,000 of taxpayers’ money over the next few decades because of student loan defaults. Below is the chart representing the outstanding credit card and student loan debt over the last ten years (Quarterly Report on Household Debt and Credit).
Recent studies show that the number of individuals who default on their student loans has been steadily increasing as well. Statistics from the Institute for Higher Education Policy (IHEP) show that between 2004 and 2009 only 37% of federal student loan borrowers were able to make uninterrupted payments; it is an annual average of 7.4% (Cunningham, and Kienzl). According to IHEP, for every one borrower who defaulted, two ...

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...tes. Department of Education, Federal Student Aid. Comparison of FY 2011 2-Year Official Cohort Default Rates to Prior Two Official Calculations. Washington DC: 2013. Web. http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdrschooltype2yr.pdf

10. United States. Department of Education. Program Integrity: Gainful Employment--Debt Measures; Final Rule. Washington: the Government Printing Office, 2011. Web. http://www.gpo.gov/fdsys/pkg/FR-2011-06-13/html/2011-13905.htm

11. United States. Federal Reserve Bank of New York. Quarterly Report on Household Debt and Credit. 2013. Web. http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12013.pdf 12. United States. Government Accountability Office. Postsecondary Education: Student Outcomes Vary at For-Profit, Nonprofit, and Public Schools. 2011. Web. http://www.gao.gov/assets/590/586738.pdf

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