A recent report has found that 49% of federal borrowers with repayment obligations beginning in 2010-12 have made no progress in paying off outstanding balances. This is largely due to slow repayment, finds Moody’s Investor Services, who has said that (opens in new tab) student debt is “weighing on household finances and the broader economy.”
Current statistics (opens in new tab) for student debt have revealed that there is currently over $1.5 trillion owed by a total 45 million borrowers. What's more, this has steadily been increasing over the last 15 years. According to Moody's (opens in new tab), we may now have an idea about why this is.
Graduates are opting for smaller monthly payments and longer loan terms, which means that their repayments are often not enough to pay off compound interest, let alone make a dent in the amount they initially borrowed. On average, borrowers in the class of 2017 owe $28,650. However, these findings suggest that they could end up paying a lot more than this if they opt for long-term, smaller payments.
Student loan balances are increasing: Why?
The increase of student loan balances has been in part down to income-driven payments on federal student loan (opens in new tab) borrowers. This bases repayments on income, family size and state of residence to make costs manageable. A rise (opens in new tab) in student loan delinquency despite low rates of unemployment suggests wage stagnation, which makes meeting even minimum loan repayments a challenge for many college graduates.
Moody's found that the students who struggled the most to make a dent in their student loan balances attended for-profit institutions and public two-year institutions. However, students from all types of institution have played a role in the rise of slow repayment.
“Even in the category with the highest repayment rate in the 2010-12 cohort - graduates of private nonprofit institutions - 20 percent of borrowers had not paid down balances,” found Moody's.
“A sizable proportion of all former students at private nonprofit four-year (33 percent) and public four-year (35 percent) schools who entered repayment in 2010-12 also had not paid down any of their debts after five years.”
The findings come in the midst of the Presidential primaries, when Elizabeth Warren and others have voiced their intentions (opens in new tab) to forgive student loan debt or reduce the burden on borrowers, some of whom are having to turn to the best debt settlement companies (opens in new tab) to avoid bankruptcy.
Although there is a lot of scrutiny towards costs, with many students turning to the best student loan (opens in new tab) companies to be able to afford tuition, Moody's found that college fees have stabilized in recent years relative to family income.
One option for the 49% of federal borrowers struggling to make a dent in outstanding loans is the best debt consolidation companies (opens in new tab). These will combine debts into one monthly repayment, making it manageable to pay off larger sums.