The Wall Street Journal’s Josh Mitchell recently authored an article in which he calls attention to the roughly 16% student loan debt default rate, as measured in terms of number of borrowers.
That data point, by itself, is extraordinarily high. In proper context, it’s calamitous.
At $125 billion in aggregate value, these defaulted loans represent roughly 10% of all student loans that are currently outstanding — and roughly 13% of those that are government-guaranteed. Yet only about half these debts are actually in repayment (because the other half represents deferred borrowings for students who are still in school). As such, that 10% (or 13%) is really closer to 20% (or 26%).
That’s nearly double the default rate for single-family mortgages at its height, in the aftermath of the 2008 economic collapse. Here too, though, that metric is also misleading.
For all other forms of consumer debt — commercial debts as well, for that matter — defaults are measured on contracts where the payments are 91 or more days past due. Only within the unique alternative universe of government-backed student loans are defaults measured at 270 or more days.
Therefore, if the Federal Reserve Bank of New York is correct at noting in its most recent Quarterly Report on Household Debt and Credit that seriously delinquent student loans (more than 90 days past due) represent 11% of all outstanding education debts, and if that metric excludes loans that have already been declared to be in default, the most accurate default rate lies somewhere between 40% and 50%.
Hence my use of the word calamitous.
Would Free College Tuition Solve the Problem?
With all due respect to both Secretary Hillary Clinton and Sen. Bernie Sanders, the notion of free tuition for higher education does nothing for those who are already encumbered.
All these debts — without regard for origination channel (public vs. private) and payment status (current vs. past-due) — should be restructured so that: