One of the effects of student loan debt is many borrowers have no financial safety net if they get hit with an unexpected expense.
In a recent Nitro survey, 41 percent of people with student loans said they wouldn’t be able to afford Home Page a surprise bill of $400. Even fewer could handle a home repair or medical emergency, which can run into the thousands of dollars. It’s hard to quantify the impact of this financial uncertainty, but money worries can take a heavy toll on health, work performance, and relationships.
Don’t Fall Behind
Most Americans try hard to meet their student loan obligations, but as balances grow, a greater number of borrowers are falling behind on their payments.
Student loans now have the highest rates of delinquency. At the third quarter of 2018, 11.5% of student loans were more than 90 days past due . In contrast, the credit card delinquency rate stood at 7.9% and the auto loan delinquency rate at 4.3%. Home equity line of credit (HE revolving) and mortgage delinquency rates were even lower, at 1.2% and 1.1%, respectively.
The challenges of repaying student loans may be, in part, because of high interest rates. As more graduates discover private refinancing options , which can lower monthly payments significantly, delinquency rates may fall.
Federal vs. Private Student Loans
The overwhelming majority of outstanding student loan debt is owed to the federal government. The remaining 19% is owed to private banks. Historically, federal loans were the first stop for most students because they were relatively easy to get and carried reasonable interest rates. However, as market conditions have shifted from the early 1990s until today, so have the interest rates on federal student loans . In recent years, new competition among private lenders has led to more options and better customer service. Especially after graduation, many students find they can get a better deal by refinancing federal loans with private lenders.
The Types of Federal Student Loans
Over three-quarters of all federal loans are direct loans. They are provided directly by the U.S. Department of Education and are available to most students regardless of financial need. Federal Family Education Loans (FFEL) are indirect loans, provided by accredited institutions but guaranteed by the government.
Perkins Loans are need-based loans of up to $5,500 a year for undergraduate students with very low household incomes; they are issued directly by the universities. Federal loans are among the easiest for students to get, but most have low annual limits , and interest rates can be high.
About $1.05 trillion of Americans’ student loan debt is in the form of direct loans . That’s a steep increase from five years ago when the total was $508.7 billion. Currently, 52% of direct federal loan debt is in repayment. About 8% is in default because the borrower hasn’t made a payment in nine months or longer. The remaining 40% is “on hold” for a variety of reasons:
- 13% is held by students who are still in school
- 11% is in forbearance
- 11% is in deferment
- 5% is in a grace period
- 1% is classified as “other”
Forbearance and deferment enable many borrowers to postpone payments if they are experiencing economic hardship, like unemployment or a medical crisis; are serving in the military; or are continuing their studies through a fellowship, residency, or postgraduate study. The main difference is that interest always accrues during forbearance, but does not during some deferments.
The current breakdown is a significant change from the third quarter of 2013, when 42% of federal student loan debt was in repayment, 24% was held by students in school, 13% was in deferment, 8% was in forbearance, 7% was in a grace period, 5% was in default, and 1% was classified as “other.”