The Ugly Truth About the Federal Direct Student Loan Program

The Department of Education recently published a series of performance summaries for its Federal Direct, Federal Family Education and Perkins student loan programs. A little more than $1.2 trillion is due from roughly 42 million students, who owe an average $29,000 each.

The most comprehensive of these reports pertains to $855 billion in Federal Direct loans, of which $440 billion is in routine repayment. That’s “routine” in that it excludes loans in deferment, forbearance or default, yet 15%, or $66 billion, of the remainder are 31 or more days past due. That’s a horrendous statistic, particularly for a “scrubbed” portfolio like the one just described, and considering the delinquency rate for credit card balances — i.e., debts that are comparably unsecured, or uncollateralized — stands at 2%, plus a little decimal dust.

It also significantly understates the extent of the problem.

Of the $88 billion in deferment, $12 billion represents loans to borrowers who are currently unemployed or suffering other economic hardships; another $97 billion of loans are in forbearance, $56 billion are in default and $6 billion are characterized as “other.” That’s another $171 billion in past-due debt, which, when added to the aforementioned $66 billion of past-due accounts in the “routine” portfolio segment, amounts to $237 billion out of an adjusted total of $611 billion ($440 billion plus $171 billion).

In other words, nearly 40% of all Federal Direct loans qualify as troubled debts of varying degrees.

That doesn’t even take into account the increasing number of loans being granted relief under the government’s various income-based repayment plans, such as IBR and Pay As You Earn (PAYE). If not for that support, the delinquency rate could very well soar by an additional 10% to 20%.

Clearly, it’s a public and private sector engendered fiasco. The only logical course of action is to break apart the problem: address the loans that have already been made, and revamp the program going forward.

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Mitchell D. Weiss

Mitchell D. Weiss is a financial services industry executive and entrepreneur. He is also an Executive-in-Residence at the University of Hartford, co-founder of the university’s Center for Personal Financial Responsibility and adjunct faculty at Rutgers University. His most recent text, Practical Finance - A Straightforward Guide to Personal and Entrepreneurial Finance, is the basis for the course he teaches at both institutions.

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