Default rate four times higher than mortgage defaults at the peak of the real estate crisis.
After the real estate market took a turn in 2009, lenders and consumers alike panicked as the default rate on mortgages topped out at 10 percent. People worried that real estate was no longer a sound investment and that the days of relying on your home as your most valuable asset were gone forever.
What does it say then, that the default rate on student loans has now reached 44 percent?
A Wall Street Journal article published last week poses that very question with the story of a borrower who now owes $270,000 for the $70,000 of student loan debt she took out to fund her Ph.D. education. So does the article have it right? Has student loan debt become a truly toxic asset?
“When four out of ten borrowers can’t pay, it’s a sign that there is something wrong with the system,” says Gary Herman, President of Consolidated Credit. “After all, when only one out of ten borrowers defaulted on mortgages, as a country we called for a complete overhaul of mortgage lending to avoid the predatory practices that helped lead us to the collapse.”
Why fixing mortgages was easier than student loans
Unfortunately, fixing student loan borrowing may be tougher than fixing mortgage lending. With mortgages, it was new types of loans like ARMs and relaxed lending standards that were causing the problems. Shoring up the approval process with stricter guidelines and eliminating loans that were determined to be predatory went a long way to undoing the damage that had been done.
By contrast, the student loan lending system is broken as a whole. Most people have federal student loans, to the tune of $1.2 trillion in total debt. These federal loans are supposed to be the best option – the safe bet for borrowing when it comes to funding your education. So where do you turn when the “best” choice has been proven to cause problems for so many consumers?
5 options for debt consolidation you can’t afford to miss
“The fact of the matter is that there’s no easy solve for student loan debt,” Herman continues. “You have a twofold problem – high tuition and cost of living leads people to take out a lot of money. Then issues with interest rates mean the debt often grows faster than it can be paid off. Even if the government comes up with the right solution for the interest problems, it won’t change how much people are being forced to borrow to afford a good education.”
With that in mind, it’s up to consumers to understand relief options available when student loan debt starts to cause problems. Even if you can’t qualify for a forgiveness program like Alice in the WSJ article, you may be able to use one of five debt consolidation programs available to lower your monthly payments.
Three of these programs are designed for people facing at least partial financial hardship:
- With income-based repayment plans, your monthly payments are set at 15 percent of your income
- Income-contingent programs set payments at 20 percent of your income
- Pay as you earn sets your payments at 10 percent, but you have to have fairly “new” student loans that had a disbursement after a certain date – so you need to have attended school recently and graduated recently.
Thankfully, even if you’ve consolidated already, many of these options allow you to consolidate debt that was already consolidated with a different program. This may help people who, like Alice, find themselves stuck with a consolidation program that doesn’t work for their budget.