If you believe conventional wisdom, student loans are “good” debt: They’re safe, lead to higher incomes, and generally pay off in the long run. The problem is that an increasing amount of evidence is showing that this thinking is distinctly unwise.
Student loan default rates are soaring, and now, according to new data from the Federal Reserve Bank of New York, the delinquency rate is also ticking up: 11.2% of student loans are currently more than 90 days past due, and that’s second only to credit cards, where 12.2% of accounts are past due. That makes the delinquency rates on student loans higher than mortgages, home equity loans, auto loans, and a mysterious “other” category.
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Good debt? Oops.
And as bad as these numbers are, they actually understate the problem. Here’s why: The consequences of student loan debt are extremely severe: The loans can’t be discharged in bankruptcy; there’s no statute of limitations on collecting on the debt; and you can’t settle them for pennies on the dollar the way you can with defaulted credit-card debt. You also can’t get a short sale or loan modification like you can with a house. What this means is that the incentives not to default on a student loan are much stronger than the incentives not to default on other loans. If standard consumer protections were restored to student loans, the default rate would likely be much higher. A rational consumer will do almost anything to avoid defaulting on a student loan.
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Parents: Please show these delinquency stats to your high school student as he or she explores college possibilities, and have them ready next time a financial aid officer tries to tell you that student loans are a good way to pay for college.
