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Posts Tagged ‘default rates’


How badly are US citizens financially struggling this late in an economic expansion?

In early January 2016, the US Department of Education announced the rate of people defaulting on their student loans had dropped from 11.8 percent in 2015 to 11.2 percent in 2016. Back in 2013, the default rate had nearly hit 15 percent.

In 2015, the Obama white house issued a report which stated, “The cohort default rate published by the Education Department is “‘susceptible to artificial manipulation.’” The report stated that the share of student borrowers paying down their loans more accurately reflects what is occurring than default rates alone. The report noted that a rising number of students are unable to make payments on their loans, but manage to avoid defaulting. Because of this, the report stated the actual default rate plus those former student loan borrowers out of school who are not paying down the balances on their loans stood at 25 percent.

However, it turns out the White House report understated the numbers by quite a lot. Leaked documents in early January 2016 showed only 46 percent of students out of school three years or more are paying down their student loan principal. This means 54 percent are not paying down their loans.

However, on closer inspection, something else is terribly amiss, as well. To be among the 46 percent, you cannot be in default, and you must have paid down the principal of your loan by at least one dollar. So if somebody who has owed $30,000 in student loans since they graduated from college ten years ago paid a dollar on the principal of their loan eight years ago, they have officially paid down their loan and are among the 46 percent. If somebody borrowed $16,000 twenty-five years ago, paid off a dollar on their balance, and haven’t paid a dime since, and have incurred tens of thousands of dollars of penalties and late fees, they, too, are among the 46 percent.

The bar for those who have not defaulted and are paying down their loans are about as low as one can get. The actual crisis, therefore, is even greater than we have been led to believe. This suggests a number of things.

One is that the number of people failing to pay on their student loan balances is significantly less than 46 percent if we raise the bar to $2 or higher. Second, the US economy is historically weak enough that tens of millions of student loan borrowers are unable to pay down their balances (There are roughly 42 million people who have student loan balances).

This suggests the economy is historically weak, and the consequences of this weakness will spread throughout the United States when the economy begins to tank this summer. This suggests defaults will be historically high on home mortgages, car loans, credit card debt, and much more. All of which, strongly suggests this next recession will be worst for the 99 percent than the Great Recession of 2007-09.

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