How a Simple Tweak to a Federal Form Could Help Borrowers Potentially Avoid Defaulting on Student Loans
— October 2, 2019
By Holger Mueller and Constantine Yannelis
Average student borrowing is growing at a rate exceeding inflation, and many college graduates are struggling to make their monthly payments. Concerns over delinquency and default are growing, and in 2018 student loan delinquency rates are higher than those of any other type of household debt. The 2018 student loan update from the Federal Reserve Bank of New York Consumer Credit Panel indicates that 4.8 million borrowers defaulted on their student loans in 2017 and 2.1 million were more than 90 days delinquent. In billions of dollars, this translates to $124.4 billion in default and $64.3 billion in delinquent balances.
Given repayment problems for many borrowers, income-based repayment plans can help many borrowers avoid default. These income-driven repayment plans link a borrower’s actual earnings to monthly payments, which insures against adverse labor market shocks. However, despite the availability of income-driven repayment options, many borrowers do not enroll in these plans and continue to default on their student loans.
Read the full Pro Market article.
Holger Mueller is Nomura Professor of Finance