Ask the “best” colleges about the student debt crisis and they are likely to trot out the very low default rates of their graduates, only 1 to 2 percent. Most of the defaulting students, they point out, come from for-profits. They also believe that the national default rate at 11.8 percent is at a manageable level.
But these rates hide more than they reveal. Default rates are managed to be low. It is in the best interest of everyone involved to keep them low: the government wants to keep the lid on its troubled policy, the government’s collection agents want to earn their fees by keeping debtors current, and the colleges want to keep the mother’s milk of government subsidies flowing in their direction.
The “best colleges” have little experience with debt defaults. They either don’t know or are reluctant to admit that, when it comes to the government’s loan program, colleges are all bunched together. Even for a college with zero defaults the only default rate that matters in a crisis is that of all debtors from all colleges.
The government is lenient, letting 9 months of no repayments pass before calling a student in default. Compare that to only 90 days on car loans or 3 months on mortgages. Students are also allowed to clear their defaults by switching from stricter repayment plans to easier ones. College lobbyists have convinced the government to measure default rates after only three years knowing that defaults accumulate over time. In fact, one in five students with over $15,000 in debt defaulted on his or her loan in the 10 years after graduation. That’s a 20% default rate.
The Federal Reserve of New York has created its own measure to gage student debt stress. Using consumer data the Fed measures how long students go without paying their debts. By this calculation in 2014 past due rates on student debt reached as high as 63%.
That leaves the government like the famous emperor without clothes. If the future of our children and the solvency of our colleges were not at stake the government might have already stopped lending. But there is probably no default rate so high that the government would abandon these priorities. At the same time it is easy to guess that changes are afoot. One of the most likely targets are controls on tuition increases. That will cause a fire storm on Washington’s DuPont Circle, the home of college lobbyists. If these lobbyists can suggest a way to put clothes back on the emperor, they should speak now.