Student loan default may put American economy at risk

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Unhappy Graduate
Millions of Americans can not pay off student
loans.

Julio
Cortez/AP


  • Almost 5 million student loans have gone unpaid for
    a significant amount of time.
  • Federal and private loans are going into default,
    making it harder for loan holders to establish credit or buy
    cars and homes.
  • The federal government is on the hook for the money if
    defaulters can’t pay.

 

Approximately 4.6 million Americans have defaulted on federal
student loans, according to The Wall Street
Journal.

This figure includes an increase of 274,000 people over the last
three months. At the end of the third quarter of the fiscal year,
these nearly 5 million defaulters represent 22% of all Americans
who were required to pay federal student loans.

When a debt hasn’t been paid for 90 days after a scheduled
payment, the loan is considered
delinquent
. If delinquency continues, a loan is at risk of
going into default, usually after about 270 days for federal
loans. The Wall Street Journal reported defaulted
student loans last quarter totaled $84 billion.

In addition to former students with federal loan payments, many
are repaying private student loans or a combination of
both. Those in debt from private loans typically have fewer
avenues for forgiveness or repayment.

Letting a loan go into default has personal consequences — and
economic ones

Personal consequences of defaulting on a loan are numerous and
cumbersome. Federal Student Aid — an office of
the Department of Education — lists penalties defaulters face
including:

  • acceleration of interest payments
  • loss of eligibility for deferments or a repayment plan
  • lack of access to additional federal student aid
  • restricted access on your academic transcript
  • garnished wages
  • inability to buy or sell assets

Defaulting, especially on the scale of $84 billion, can also have
repercussions for the entire economy. The Federal Reserve Bank of New
York
has researched how student debt has depressed home
purchasing by young adults, and found that as much as 35% of
the decline in home ownership of people in their late 20s can be
attributed to student loans. Defaults make it harder to take out
credit or even own a credit card, stifling additional economic
activity. 

Even with a strong national economy and a low unemployment rate,
loan defaults can weigh down the entire country. Permanently
defaulted loans are ultimately the burden of taxpayers, and the
federal budget will pay out if the loan program continues to lack
revenue. 


The US Department of Education
announced on Monday that it
would not be cancelling the debt of thousands of students who
were victims of fraud by for-profit colleges. Secretary of
Education Betsy DeVos has previously mentioned plans
to scale down federal loan forgiveness presented by the Obama
administration.

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