Why are delinquency rates still rising for student loans while those for mortgages, home equity lines of credit, auto loans, and credit cards are all declining now that the economy is recovering?
And how can public policies help student borrowers avoid delinquency?
The New York Fed’s recent Quarterly Report on Household Debt and Credit for the fourth quarter of 2014, which revealed that delinquency rates are not improving across and over 9 years defaults are as high as 26 percent.
The problem is: There continues to be more widespread misunderstanding about the terms, conditions, repayment and impacts of student loans than for any other federal loan or subsidy programs.
The rules for private student loans, mortgages, credit cards and other consumer loans have all been tightened, and these sectors are reporting record low rates for delinquencies and defaults. But federal student loans throw many private sector best practices and rules out the window with predictable results: excessive borrowing and high defaults.
Yes, there have been great efforts to simplify the FAFSA (Free Application for Federal Student Aid). But, with multiple websites, hosted by some 11 loan servicers, as well as the U.S. Department of Education itself, and no mobile platforms with any standardization, the student loan program’s online presence is confusing, not user-friendly. In short, the Education Department disburses almost $100 billion annually in loans very well. But the Department doesn’t do nearly as well at promoting responsible financial behavior by student borrowers.
Learning from the best practices in the private sector, public policymakers can take five steps towards reducing student loan defaults.