Why student loan delinquency rates are rising

Student loan delinquencies rates are up, way up. According to New York Federal Reserve data 90 day delinquencies have risen 2.5 percent to 11 percent since Q1, 2012. These non-payment rates keep rising in to the tens of billions of dollars despite several types of payment plans offered by federal student loan servicers. Among these plans are the income-contingent repayment plan and the income-based repayment plan, both of which reduce the monthly cost of paying back student debt to a manageable amount. So why do grads keep defaulting?  

Complicated applications

As evident in the following payment programs chart, of the three kinds of income linked payment plans, two have to be applied for on an annual basis. Documentation needed includes a tax return, proof of income and an application form. For the borrowers who forget to remember line X, on document Y, written in font Z, that can mean thousands of dollars of extra interest due to a late payment. Even rocket scientists make errors, it would be wise to assume grads will too. 

Insufficient mediation

If a graduate has a complaint against a financial institution that services a Department of Education loan, that loan is mediated by none other than the Department of Education. The potential for conflict of interest is recognizable. The complaint process is further stifled by poor federal disclosure requirements if required at all.  For example, notification of payment plan expiration is not required to be sent by certified mail, and student loan servicers are not necessarily required to prove they even send such notification. 

Negative amortization

The rise in student loan delinquency is also due to negative amortization. This is when the balance of a loan increases, often indefinitely, because the amount of a monthly payment is less than the amount needed to cover the cost of interest. Even though the federal employees, loan officers and others will incessantly repeat the mantra of working with student loan servicers to implement an affordable payment plan, the loan is really not affordable when it is negatively amortizing. Snowballing debt is not a good way to hit the ground running when professional life is only beginning.

Failed investment

Investments that fail lower individual net worth. Naturally, a healthy thing to do would be take the loss and find alternative solutions; in colloquial terminology, suck it up and move on. This is the advice given by some of the same people who would quite possibly consider short selling their home or defaulting on their mortgages because the value of their real estate is less than the amount of the mortgage. Home owners got bailed out to the tune of $22 billion dollars in mortgage relief per Reuters, student loan borrowers have the benefit of no such program.

Federal protection

Federal student loans are usually not subject to typical rules of bankruptcy relief. The Department of Education and their loans are also subject to immunity from the Fair Debt Collection Practices Act. In effect this makes the government above the same law that many Americans attempt to follow. Apparently, the fiscal solvency of the student loan program is jeopardized by loan forgiveness, yet the federal national debt is set to expire in less than two months and has surpassed $16 trillion dollars; an amount in the vicinity of a 1:1 federal debt-to-income ratio.

A problem with student loans is they were originally encouraged via relatively easy availability to fuel the economic need for an educated workforce. That workforce has been experiencing high unemployment and the labor force participation rate had dropped to the lowest level in decades. This means the same need for educated people that federal programs were intended to meet is not there. Even though the promissory notes for these loans were signed under penalty of perjury, there is a flip side to the coin. Namely, a federal intent of educational benefit that's conditions are no longer completely valid.  

The student loan debt crisis: How it started and where it's going

This guest post is contributed by Katheryn Rivas, who writes for online universities blog.  She welcomes your comments at her email Id: katherynrivas87@gmail.com.

If you have student loans or if you keep abreast of current events, you've likely heard the statistic that for the first time in history, student loan debt has surpassed credit card debt, closing in quickly on a trillion dollars. Many economists fear that the next debt crisis will be a fall out from student loans, as tuition and student loan interest rates skyrocket and as college degrees become increasingly necessary entrance tickets to the workforce. Making matters worse is an employment landscape that is especially bleak for young graduates.

Over the past two years, student loans have been hotly contested in the media and among average citizens. In fact, one could argue that a very significant part of Occupy Wall Street was composed of students who felt helplessly engulfed in student debt that they couldn't afford to pay back. The reasons for mounting student debt are various, but perhaps the biggest reason is that tuition rates are far outpacing the rate of inflation. Even state university tuitions, which typically have been drastically lower than private university tuitions, are unaffordable for the average family.

Completing a college education, for the average American, necessitates taking out on average $23,000 in loans for a bachelor's degree. Because student enrollment in college is so high, a bachelor's degree, while certainly a requirement for most good jobs, is not necessarily a guarantee of securing a good job as in the past. There are just too many bachelor's degree holders out there, all competing for a small number of jobs. Another factor in the student loan debt crisis is that students, who are often a mere 18 or 19 years old when taking out these crippling loans, don't necessarily always understand the magnitude of their decision nor the precise terms of repayment.

There's been talk in the media, too, of a student loan debt bubble similar to the mortgage crisis, which was responsible for igniting our current economic depression. While there's certainly something to be said for this theory, it's unlikely since, unlike subprime mortgages, student loans are mostly backed by the government, and the government often goes to extreme lengths to guarantee repayment, even if it means wage garnishments, tax levies, repossession of homes, etc.

Essentially, student loan debt won't bring our economy down to its knees, but it certainly has kept our economy down since so many former students are paying back loans instead of putting money into the economy by making purchases. Congress has discussed various ways of fixing the student loan debt crisis. Some of the proposed legislation discussed recently includes the Student Loan Forgiveness Act of 2012, which would use various measures to help distressed students repay, like improving the public works option to forgive debt, as well as enabling former students to refinance loans.

For those of you mired in student debt, be on the lookout for government legislation that can potentially help you. The most important thing to remember is that there are various options you have already before defaulting, including a deferred payment plan for low-income earners and loan consolidation. Defaulting on student loans almost always spells certain financial ruin.

Tens of Thousands of Americans debilitated by federal student loan debt

American students and graduates are heavily indebted to the government and financial institutions for debt incurred via investment in education. According to Consumer Reports, the total amount of this debt exceeds $1 trillion an amount approximate to 7 percent of the nations annual gross domestic product. Federal Reserve Bank data indicates this $1 trillion in national student loan debt accounts for 40.7 percent of total consumer debt which includes revolving credit, real estate mortgages, and car loans.

President responds, but not enough

A petition to the Whitehouse has been signed by over 32,000 debtors demanding action to a real problem. This is just one of several large scale efforts to shed light on the issue. President Obama addressed this nationwide problem of unsustainable student loan debt and interest. A recent  executive order allows student loan repayment terms for new graduates to go in effect in 2012, and eases income contingent payment plans to 10% of discretionary income. It also shortens terms of forgiveness to 20 years of repayment. The San Francisco Chronicle outlines additional details of these changes, however what these changes do not allow are relief to students already in repayment according to Mark Kantrowitz of the New York Times. Moreover, graduates in repayment are subject to a generational law that serves to facilitate student loan repayment under far different economic conditions, from a different time.

Federal law endorses double standard

A double standard also exists between how the government loans and private debt are handled. Essentially, government loans claim sovereign immunity from debt that would otherwise be able to be restructured or forgiven under Chapter 11 and Chapter 13 bankruptcy law. The purpose of these latter laws are to help individuals and families bogged down in unrealistically high debt rebuild their lives and contribute to a health economy with manageable bills rather than sink in to a sea of eternal repayment of interest that subjugates individual and small business development via financial dysfunction. Additionally, if a graduate in repayment loses a job or enters forbearance for medical reasons, the 25 year conditional repayment forgiveness resets. In other words, these loans can't  ever be forgiven is borrowers don't have a perfect life that doesn't cause interruptions in their loan repayment schedule; it's unrealistic.

Lender terms and practices are oppressive

Lower interest rates via consolidation do help, but lenders such as Nelnet, Inc. that claim to comply with federal regulations are not required to do anything more. For example, Nelnet, Inc. claims no correspondence is legally required to warn a secondary owner of a consolidation loan that reapplication for income contingency plan is about to expire. If the primary loan owner does not inform the secondary owner, then any bonus interest savings acquired from years of on-time repayment are automatically disqualified upon late payment. These small changes can vastly affect a student's ability to repay their loan both functionally and realistically with little consequence to lenders.