Outstanding student loan debt is now the second largest form of consumer debt, but about half of the $1 trillion in student loan debt isn't being repaid because the borrowers are struggling to make payments, according to an analysis released Monday by the Consumer Financial Protection Bureau.
Using data from the Department of Education and the National Student Loan Data System, the CFPB found that as of June 2013, more than 7 million borrowers were in default on federal or private student loans, meaning they are more than 270 days late on a payment.
"Defaulting on a federal student loan has serious consequences," Rohit Chopra, the bureau's student loan ombudsman, said in the report. "Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order."
Of the nearly $1 trillion owed for federal student loans, $146 billion isn't being repaid because the borrowers are still in school, and just more than $90 billion is outstanding because the borrowers are in forbearance, meaning their payments have been temporarily suspended, but interest continues to accrue.
Another $90 billion is outstanding because the borrowers have defaulted on their loans. But the average amount of debt for defaulted borrowers is about $14,500 – far below the average of $27,000 that students typically amass throughout college.
Ben Miller and Alex Holt of the New America Foundation say that could be a sign that borrowers who end up in default may have dropped out early in their college careers and are not earning as much as those who finished their programs. Those who finished their programs pose a lower risk of default, despite having accumulated more debt.
"They may get a little bit of an earnings return for having completed some college, but not as much as if they'd finished," Miller and Holt wrote in a blog post on the data. "For that individual, they might actually be better served with more debt if that would help them complete."
And although millions of borrowers are still struggling to make payments on their loans, just slightly more than 10 percent of federal loan borrowers are enrolled in some sort of income-based repayment plan. Under the federal "Pay As You Earn" plan, for example, monthly payments can never exceed 10 percent of a borrower's income, and any debt left over after 20 years is forgiven. Less than 50,000 borrowers are enrolled in that plan.
Meanwhile, nearly 10 million borrowers are enrolled in the standard 10-year repayment plan, and 3.35 million are enrolled in extended or graduated repayment plans that drag out payments over a longer period of time, or gradually increase payments over time.
The low numbers of borrowers enrolled in repayment plans based on income suggests that many students may not be aware of the available options and that colleges, financial aid administrators and the Education Department need to do more in terms of outreach – a sentiment that numerous student loan experts and President Barack Obama have expressed as student debt continues to increase.